In BSW Blog, BSW Philosophy, Economic Outlook, Portfolio Commentary

“Go to the ant, you sluggard! Consider her ways and be wise, which having no captain, overseer or ruler, provides her supplies in the summer, and gathers her food in the harvest.”

-Proverbs 6:6-9

Continuing on our theme of pro-activity, this morning we transitioned ALL BSW-managed money market fund positions to cash/bank deposits.  In light of Congress’ ongoing inability to find a compromise solution to the debt ceiling issue, it is increasingly likely that the US may be downgraded from AAA and possibly endure a technical default (no matter how minor or short-term).

As discussed in prior posts, any downgrade and/or technical default has the potential to disrupt financial markets and may create a rush for liquidity. In such a liquidity rush, money market funds (which often hold instruments linked to US Treasuries) might come under considerable duress.  Whether this duress is real or just feared is debatable — as most money market funds also hold European bank debt and commercial paper.  Still, as is so often demonstrated, the perception of a problem is generally greater than the reality of the problem.

Just to be on the safe side, we have moved all BSW clients out of money market funds and into plain vanilla, FDIC-insured bank deposit cash. There is essentially no downside to the switch, considering that money market funds currently pay a whopping 0.01% of interest — basically the same rate of interest earned by bank deposit cash.  Once the Washington drama has (temporarily) subsided, we can easily move back into money market funds.  Considering how slow the money market funds which “broke the buck” in 2008 were to make investors whole, why bear the risk?

Once again, it is BSW’s stance that some muddling deal will be struck and that the chances of a true default remain miniscule.  But one of BSW’s key investment disciplines is being PROACTIVE rather than reactive.  Aesop’s wisdom in the Ant & the Grasshopper (circa ~500 B.C.) is still as valid and relevant today: “To work today is to eat tomorrow.”

1919 Milo Winter illustration of Aesop’s Ant & Grasshopper fable.

If you have any questions regarding this transition or would like to discuss your portfolio in greater detail, please don’t hesitate to contact BSW.  As always, we are happy to help.

-David Wolf, Chief Investment Officer

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