I got an important question from someone that deserves an answer in these wild times:
“So Mike
Just how safe do you think our cash is in our investment accounts??? If Corporate America defaults on their bonds and bank loans, just where is the cash going to come from to cover these failed commitments??? I don’t care if they don’t pay me any interest, but negative interest rates or loss of par value is going to be a catastrophic realization for all investors brokerage accounts?“
This is something that has crossed my mine in the past few weeks, but I’m not worried about it now with the recent Federal Reserve actions this week which amount to printing unlimited money to prevent the default of corporate high grade corporate bonds, CD’s, and mortgage securities.
Yep this is what they said they would do on Monday – unlimited QE. Of course they had already announced that they were going to buy Treasury bonds the week before that as there just aren’t enough real people to step in buying them now when they have such low rates when the country now faces an accelerated budget deficit bust.
One thing to remember though is that FDIC insures bank deposits up to $250,000. So if you buy CD’s each one is insured up to that amount assuming each CD is from a different bank.
There is no reason to think FDIC insurance would not pay on a default if it were to happen.
But yes it is possible for a brokerage to fail.
It has happened a few times in the past thirty years with some small firms.
US brokerage firms also carry SPIC insurance – that insures up to $500,000 worth of securities in an account, which includes up to $250,000 in cash deposits with the broker.
Again there is no reason to think SPIC would not pay if the broker default.
The best way to mitigate from this risk if you have a large amount of money is to spread it out among multiple brokerage firms, CD’s, and banks.
The real risk though we face in my view is not the default of accounts, but that down the road inflation is going to explode to erode the value of money. The Federal Reserve has launched unlimited QE to backstop all of these firms and corporate America.
That’s fine for now.
But at some point in the future this Federal Reserve action will begin to generate huge inflation that will erode the value of money. Investing in things that will benefit from that is the way to not just solve this problem, but to ultimately benefit from it in my view.
Right now the recessionary/depressionary forces are so powerful that inflation is not happening at the moment. But when the financial markets bottom out for real and the virus situation begins to pass I expect inflation will begin. This will be the cost of the unlimited QE and sending checks to people and bailing out the corporations.
-Mike
