I have written extensively about how my analyses indicate the existence of many asset bubbles. These asset bubbles, and their dynamics, pose a great danger to investors, especially during times of heavy selling pressures and concomitant liquidation that accompanies significant market distress. My analyses indicate that these heavy selling pressures will be especially high during the next financial market “crash,” given various issues, some of which I recently discussed in the September 18, 2013 post titled “Has The Financial System Strengthened Since The Financial Crisis?”
As such, I feel that it is especially important for investors to fully understand the underlying risk of their investments. Among various important concepts is whether investors are getting adequately compensated for the amount of risk inherent in an asset.
Money market funds is one large asset class that is especially concerning. Recently, there have been many articles written about the money market reform efforts. Two articles that I found to be particularly notable summaries were the New York Times article of September 19 titled “Money Funds Are Circling the Wagons on Rules” as well as the Barron’s article of September 23 titled “Nearing the End of Money-Market Reform.”
While money market funds have varying characteristics – and as such making broad generalizations is often inadvisable – I believe that the underlying general characteristics of many money market funds makes them vulnerable to significant, if not substantial losses during significant financial market turmoil, such as the “crash” scenario mentioned above.
Going forward, I believe two key determinants of money market fund safety will be:
Regulation: Although it is difficult to predict what regulation will be enacted, I believe that certain aspects of current proposed regulation will make money market funds more susceptible to losses, not less. Another key question is what regulation can insure money market fund safety, on an “all things considered” basis.
Guarantee of Principal: Will (and can) money funds’ principal balances be (effectively) guaranteed by the U.S. Government or the (money market) fund sponsors, thus guaranteeing principal?
The key issue is one of risk assessment. As many will agree, among the worst aspects of money management is to believe that an asset is “safe,” just to find out later that such a belief was mistaken.
As mentioned above, perhaps the key question with regard to money market funds is whether, as an investor, one is being adequately paid to shoulder the risk inherent in money market funds? For most of these funds, I would say that, on an “all things considered” basis, that investors are not being adequately compensated.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1693.77 as this post is written