You know I’m bearish right now. I happen to be early, too – though it’s looking more and more likely I won’t be “early” for long.
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The signs of a major move lower are everywhere. The big debt- and deficit-driven U.S. indexes are soaring; so are 10-year Treasury yields, back above 3%.
And most dangerous of all, the U.S. Federal Reserve is hell-bent on draining tens of billions of dollars – vital liquidity – out of the markets, month in, month out.
That makes this “twilight of the bull” the perfect time to build a cash position – both for protection and to have plenty on hand to get on board the inevitable violent market rallies that are the trademark of bear markets.
The thing is, there are lots of ways to add cash to your holdings: Interest-bearing insured bank accounts, certificates of deposit, and U.S. Treasuries.
So right now, I’m going to show you the safest, most cost-effective way to hold greenbacks…
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As the Treasury continues to pound the market with supply month after month and the Fed keeps pulling money out of the system, bond yields should break out and go much higher.
There are a couple of compelling reasons to look at the shortest-term options – not just because it’s important to stay nimble when the world’s collapsing around you.
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These would be Treasury bills or short-term Treasury notes that you could purchase without fees direct from the U.S. Treasury through its Treasury Directwebsite. There you can open an account similar to a bank CD account and manage your T-bill holdings via your web browser.
Through this account, you can purchase not only short-term T-bills and notes, but also longer-term notes, as well as bonds – including U.S. Savings Bonds.
The Treasury offers a guided tour to introduce you to these accounts.
When interest rates are rising, like now, you’ll want to hold just short-term paper. You can set the account up to roll over your holdings as they mature or pay the cash back to your bank account.
But when rates start to plateau, you may want to extend the term of your holdings by buying notes and bonds to lock in higher rates for the long term.
When there’s uncertainty about rates, you could do what bond pros call “laddering.”
Laddering is a strategy that involves purchasing fixed-income securities with different maturity dates to capture solid interest income returns without needing to try to time the market.
But the question here and now is one of market timing. After a decade of receiving virtually zero on their cash savings, investors can finally look forward to getting a return on those savings with virtually no risk.
So now we know this paper is the best way to be in cash. The next thing we need to know is what kind of duration gets us the most bang for our buck.
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For the answer, let’s look at what bond traders call the “short end of the curve.”
This Spectacular Chart Shows Us Just What to Buy
Let’s consider three-month (13-week) Treasury bills and two-year Treasury notes
First, here’s the 13-week (three-month) bill rate in visual terms:
This chart is spectacular! It’s a dramatic picture of just how fast the money market is tightening as the Fed pulls money out of the system while the U.S. Treasury keeps needing more and more cash to pay its bills.
In just a year, the three-month bills have soared from paying 1% to 2.20%, and there’s no end of that in sight.
Remember, the federal budget deficit has ballooned because of the Trump tax cut and the subsequent Budget Busting Agreement (BBA) that has sent spending soaring.
The federal government is burying the money market with massive amounts of new debt, month in and month out.
There’s no reason to believe this will end any time soon.
Likewise, massive deficit spending is likely to assure economic data will remain positive for the foreseeable future. So there’s little likelihood that the Fed will back away from tightening.
When would the central bank stop tightening? Well, that would likely take what Janet Yellen calls a “material adverse event.” How “adverse” would this event be? I have interpreted it as a severe economic contraction or massive stock market plunge. Last week, Fed Chair Powell said essentially the same thing.
Like I said, I think it’s a smart idea to build a cash position so you’re prepared for the “material adverse event.” Cash will give you flexibility, safety, and capital with which to buy stocks at fire-sale prices; bear market rallies can be violent and lucrative.
The bottom line is the best cash strategy right now is to keep on buying 13-week bills and rolling them over until there are signs that Fed tightening is coming to an end.
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