Downtown Boston is under a virtual state of siege.
Manholes are welded shut. Armed Coast Guard boats are patrolling Boston Harbor. Sections of Interstate 93 will soon be closed. And the subway’s North Station is being shut down.
Heightening the tension, the FBI’s Boston Field Office said on Friday that it had received “unconfirmed information that a domestic group is planning to disrupt the Democratic National Convention by attacking media vehicles with explosives or incendiary devices.”
And earlier this month, Homeland Security Secretary Tom Ridge warned of “large-scale attacks” on American soil to disrupt the democratic process. Specifically, that includes threats to aviation, mass transit, and infrastructure in Boston, according to a recent Homeland Security bulletin.
Tom Ridge and others have apparently been so alarmed by the credibility of the reports, they’ve said it may even be necessary to postpone the elections – an idea that was almost unanimously rejected by the House on Thursday.
Despite any partisan politics on both sides, however, it’s evident that the threat to our nation is real.
What may NOT be so evident is which investments are vulnerable in times like these and which are not. So let’s review three major categories:
Stocks: Vulnerable
For nearly two decades, Americans have been shifting their money from CDs and other money markets into stocks and stock mutual funds. Financial planners encouraged the move. Brokers pushed it. Even the government got in the act, proposing that Social Security funds be invested in the stock market.
They tried to portray the stock market as a place for your retirement money – even for your keep-safe funds. They argued that “the market averages always recover from crashes” and “always do well in the long term.” Unfortunately, they neglected to point out the fallacies in those arguments:
Fallacy #1. As a rule, investors don’t buy the averages; they buy stocks. And many of those stocks, especially in bankrupt companies, may never recover.
Fallacy #2. “Long-term” can be a quarter century or more. Even if the markets recoup more quickly, many investors are too close to retirement – or simply too old – to wait.
Fallacy #3. Typically, most investors do most of their buying when the market has its best performance (in the latter stages of a rising market). And, to compound the error, they do most of their selling when the market’s performance is at its worst (near the bottom). So for many investors, the losses are far larger than the averages imply. For them, even a quarter century of steady market gains may not be enough to recoup.
Right now, the tech-heavy Nasdaq has plunged to a 9-month low … the blue-chip Dow has fallen below the 10,000 level … and after six consecutive weeks of losses, the S&P 500 index is hovering just two points above its low for the year.
This swan dive has been caused by a lot more than just terror fears. But it brings home the fundamental fact that stocks are, by their very nature, volatile and vulnerable. Just consider some factoids of market performance over the past half decade:
* As of Friday’s closing bell, the S&P 500 Index is still down 28.9% from its all-time highs, and the Nasdaq Composite Index is down a whopping 63.4%.
* Shares in Ford Motor Company are worth less than $15 each. At their peak in 1999, they sold for close to $35.
* GM shares are selling for $43. At their peak, they fetched about $95.
* Intel is down to less than $23 from a pre-bear market high of $75.
* Cisco has fallen from $81 to $21.
* Delta Airlines has dropped from over $70 in 1999 to $5.59 on Friday, near its lowest level in over 30 years.
Even if these stocks continued to rise at the same pace as they did in 2003, it would take years for them to regain their previous glory. Now, if the rally is dying, how long will investors have to wait?
Are there exceptional stocks that have made – or will make – new highs? Yes. But they’re still vulnerable to the multiple risks we face in the world today.
Bonds: Less Vulnerable
As you know, bonds are typically less prone to declines than stocks. So when fear sweeps Wall Street – from almost any source – many stock investors automatically switch to bonds, driving bond prices higher.
But rallies in the bond market can often be deceptive. Bulging federal deficits and inflation can easily wipe out any gains. Selling by foreign investors is another threat to bonds. Some extreme historical examples:
* 1980, when a $10,000 par value 30-year Treasury bond plunged to about $5,500,
* 1981, when they fell to $4,300, and
* 1994, the worst calendar year for bonds in recorded history.
These are disasters that Wall Street doesn’t like to remember – let alone talk about with customers.
Sure, the government guarantees your interest and principal. So if you can hold on to your Treasury bonds until maturity, you’ll eventually get all your money back. But you’ll also be stuck with today’s low yields for years. And if inflation worsens, the money you get back years from now will be worth a heck of a lot less.
What about corporate bonds? Unless you choose the cream of the crop, you’ll have an additional risk: Possible defaults. And that’s true not only for junk bonds, but also for bonds that currently boast an “investment grade” rating.
U.S. Treasury Bills: Least Vulnerable
No investment is perfectly safe from an ultimate, worst-case scenario. But among all the investments in the world today, United States Treasury bills are, by far, the least vulnerable of all.
Unlike Treasury notes (medium term) and Treasury bonds (long term), Treasury bills are very short term and barely fluctuate in price. Even their minuscule ups and downs can be avoided simply by holding on to them for the short time to maturity.
How do Treasury bills hold up in periods of extreme national crisis? Let’s travel back in time to consider a few actual case studies …
Case Study #1. Washington, D.C. – March 1980
Jimmy Carter is in the White House. The fear of inflation is so rampant investors are unwilling to buy Treasury bonds. They believe their money could be virtually worthless by the time their bonds mature 20 or 30 years later. Even government security dealers on Wall Street, who buy the Treasury securities at official auctions and then sell them to the public, are unwilling to put up any more money.
As a result, it has become very difficult for the government to raise the funds it needs to run the country. To try and avoid a national financial disaster, a group of government security dealers visit the President, and they ask him to end the emergency by taking extreme measures against inflation.
At first, Carter balks. He’s up for re-election. Anything he does to cut inflation will hurt the economy; and if the economy falls, it could kill his chances for a second term. The Democratic convention, to be held in New York City in August, is still five months away. But the primary campaign is well under way, and politics is dominating the talk in Washington.
The pundits say Carter is probably going to do whatever it takes to win the election. They figure he’ll keep pumping up the economy, let inflation run amuck for now, and then worry about fighting it AFTER he’s won a second term. This view is widespread, and it just adds to the gloom on Wall Street. The market for U.S. Treasury bonds, one of the largest markets in the world, grinds to a virtual halt.
Some doomsayers even begin to doubt whether short-term Treasury bills, the safest of all Treasury securities, will survive the crisis intact. They say “America is going down the tubes for good.”
But they’re wrong. The government security dealers tell Carter that, without a viable market for U.S. Treasury bonds, the government can’t raise enough money to meet government payroll. They explain that if the bond market can’t be revived, he may have to shut down the government.
Carter knows anti-inflation measures could cause a decline in the economy. And he knows a weak economy could make the difference between getting re-elected or not. But he has no choice. He acts decisively – with sharply higher interest rates and stringent credit controls.
Sure enough, inflation recedes … the economy falls … and Carter loses the election. But the bond market is revived, and U.S. Treasury securities survive.
Case Study #2. Providence, Rhode Island – January 1991
Governor Bruce Sundlun has just declared a banking holiday. He has shut down all state-run savings banks, freezing their assets and declaring a moratorium on withdrawals.
In response, depositors pour into the streets in protest … shout for the governor’s resignation … demand their money back.
But there is one group of Rhode Island bank customers that has another concern: Instead of buying bank CDs, they’ve bought United States Treasury bills directly from the Treasury Department. That was smart. They won’t lose a dime in the bank failures.
Trouble is, many have left standing instructions with the U.S. Treasury Department to transfer their funds directly to their banks, and those banks are now closed. So they’re afraid that when their Treasury bills mature this week, the Treasury is going to wire their money into a frozen bank account!
To their great relief, Treasury officials decide to take an unusual step. They cut paper checks and send them out to each investor by first class mail.
For those of us who watch the Treasury Department closely, this is a very critical event that illustrates how the Treasury will probably react in a future crisis: They will do everything humanly possible to deliver on their promises.
Case Study #3. Washington, D.C. – Late 1995
President Clinton and the Republican Congress are at loggerheads about the federal budget, and the impasse is so severe it has temporarily shut down the federal government.
Congress will simply not authorize an increase in the debt limit, making it legally impossible for the government to borrow any additional money. But Treasury bills are coming due every week. If the government can’t borrow from Peter to pay Paul, it faces a default on Treasury securities for the first time in history.
In response, politicians on both sides of the impasse do everything necessary to avoid that outcome. More importantly, Treasury Secretary Rubin bypasses standard procedure and authorizes an unusual maneuver to transfer funds from government employee pensions to the payment of Treasury bills coming due.
Result: Treasury bills are protected – all investors in Treasury bills get their money promptly and in full.
Case Study #4. New York, September 13, 2001
Rescue workers still toil around the clock to find survivors in the wreckage of the World Trade Center, and the New York Stock Exchange remains closed for trading.
But the market for Treasury securities is open. In fact, Treasury securities are the very first instruments to change hands on a U.S. market since the terrorist attacks on Tuesday.
The 10-year U.S. Treasury note swings by a full point due to concerns about insurance losses and the impact of the attacks on the federal budget. But a full point move in 10-year Treasuries is not unusual. In the past, much greater fluctuations have been caused by far lesser traumas.
Meanwhile, in the shorter end of the Treasury market, prices actually go up. The 2-year note rallies and the shortest term U.S. Treasury securities – Treasury bills – are sought as a safe haven in time of national crisis.
Four Victories For Treasury Bills
This gives you four diverse situations in which Treasury bills survived every threat: One case of a major threat from inflation, one case of a banking breakdown, one case of a political impasse in Washington, and one example of a major terrorist attack.
Every time, the U.S. government gave top-most priority to U.S. Treasury securities. Politicians and bureaucrats sacrificed the economy … risked political suicide … overrode standard operating procedures … or opened markets despite a national market shutdown – all for the sake of protecting U.S. Treasury securities.
Thus, history tells us that, even in a worst case scenario, U.S. Treasury bills are likely to be the ultimate survivor.
How To Invest In Treasury Bills
There are several ways to buy them:
1. Through your bank or brokerage firm. They will charge you a transaction fee, but it can sometimes be convenient to have all your funds under one roof.
2. Directly from the U.S. Treasury Department. For the details, go to http://www.savingsbonds.gov/indiv/research/indepth/tbills/res_tbill_buy.htm
3. Through a money market mutual fund that invests exclusively in short-term U.S. Treasury securities or equivalent. There are many good ones to choose from, and I can’t list them all here. But here are five examples:
* American Century Capital Preservation Fund (CPFXX). Call 800-345-2021 or go to http://www.americancentury.com/funds/fund_facts.jsp?fund=901
* Dreyfus 100% U.S. Treasury Money Market Fund (DUSXX). Call 800-645-6561 or check out http://www.dreyfus.com/content/dr/control?Content=/docs/mfc/dreyfus-funds/factsheet.jsp&fundcode=0071
* Fidelity Spartan U.S. Treasury MMF (FDLXX) – 800-544-8888 or http://personal.fidelity.com/products/funds/mfl_frame.shtml?31617H300
* USGI U.S. Treasury Securities Cash Fund (USTXX) – 800-873-8637 or http://www.usfunds.com/funds/cash_doc.asp
* Vanguard Treasury Money Market Fund (VMPXX) – 800-662-7447 or http://flagship5.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0050&FundIntExt=INT
Warning: Don’t be disappointed by the low current yields. They’re a small price to pay for a good night’s sleep. I’m confident they’re going up.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
