timing is everything

PBS Writes: Is your money safe at the bank? An economist says ‘no’ and withdraws his

bank run investwithalex

Why do I risk starting a run on Bank of America by withdrawing my money and presuming that many fellow depositors will read this and rush to withdraw too? Because they pay me zero interest. Thus, even an infinitesimal chance Bank of America will not repay me in full, whenever I ask, switches the cost-benefit conclusion from stay to flee.

Let me explain: Currently, I receive zero dollars in interest on my $1,000,000. The reason I had the money in Bank of America was to keep it safe. However, the potential cost to keeping my money in Bank of America is that the bank may be unwilling or unable to return my money.

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After reading this article I am seriously considering running into my bank later on today and screaming out “Give me all of my money Bi*%#@, NOW”. It’s just my hope that they won’t misinterpret my demand for my own money and give me all the money in the vault. I don’t’ think the FBI would appreciate my sense of humor. (On the side note, I wonder how many keywords this paragraph has set off at the NSA).

Anyhow, I actually tried to withdraw a fairly large amount of money at my local branch of Bank of America a few years ago. Without giving it a second thought I walked in and asked for a miserly $125,000 in cash. With a smile of course. They gave a deer in a headlights look, the same kind of look I would expect if I was trying to cash in about $20 Billion, and then proceeded to tell me “I am sorry, we don’t have that kind of money on hand, would you like us to request that for you and you can come pick it up in 2 days. “

WTF? You have a huge vault and you don’t have $125,000 in cash on hand? That is not good.

Listen, the article above is right on the money when it comes to our banking system and highly recommend that you read it in its entirety. The bottom line is, the American banking system is only as stable as the perception of stability associated with it. The banks, by their greedy nature, have lent out all of the money they have had.

If there is a run on the banks, no commercial bank in the US today will be able to meet its obligations to the depositors. Surely, the government will backstop, but that’s not the main point here.

The main point is that the banks are not paying any interest on deposits. Thanks to the FED and their interest rates policies, you would be lucky to get 0.05% APY on your saving account. That doesn’t sound fair, does it? I don’t know why Obama and Bernanke/Yellen hate our senior citizens on fixed income so much.

Now, based on my mathematical timing work, I reject the notion of the “PermaBears” and “Gold Bugs” that our economy and our markets will completely collapse, there will be a banking holiday and we will all be shooting rabbits for food. Again, it is not going to happen.

While I believe your money is inherently save at this juncture, I do agree with the premise of taking your money out of the banking system and trying to get a higher yield elsewhere. That is, if you want.

So, what should you do?

1. Never have more than the FDIC insured amount on deposit at any given bank. If you do, you are a stupid wanker just asking for trouble.

2. Open a safety deposit box and store some cash there. Always have a substantial amount of cash on hand. If you want to take the diversification to the extreme open bank accounts in Hong Kong or Singapore and store your cash there.

Then what?

Do nothing. Just sit on it. Yes, I can give you some tips of what to do if you would like to earn higher yields, but that would come with additional risk. Believe it or not, I think the US Dollar is substantially undervalued and will do very well over the next few years while financial markets around the world come down to the tune of 40-60%. Including the US.

Having large quantities of cash at the bottom of the bear market will allow you to come in and buy wonderful companies at huge discounts and that is how you make a lot of money over the next 5 years or so.

BTW, I gave the same advice to my clients in 2006-2007 and that worked out pretty well.

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