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How To Manage Your Cash: The Warren Buffett Model
David Reavill
 June 29 2024 at 01:39 pm
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Warren Buffett, CEO of Berkshire Hathaway. ** Recently, my sister-in-law asked for suggestions on where to place some extra cash. She wants to refrain from investing these funds, as she may need them in the future. So, where's a good place to put idle cash?I get this question fairly often, and I'd like to explore this important component of most people's investment profiles.Cash Management Cash management is a vitally important discipline on Wall Street. It's no place to let your money sit idle, as those extra percentages you can gain by investing cash wisely can make all the difference in your long-term returns. And perhaps even more importantly, any cash investment gone wrong can tarnish a sterling reputation. No one knows this better than Warren Buffett. After all, he's likely the most famous investor of our time and has been on Wall Street longer than most people have been alive. What's more, Buffett has accumulated the largest "stash of cash" in history. His holding company, Berkshire Hathaway, has an incredible $163 billion in cash in its latest annual report (for year-end 2023). It's an unimaginable sum, made all the most so when you realize that only four banks in the country, JP Morgan Chase, Bank of America, Citibank, and Wells Fargo, have a net worth greater than that. And three of the four have recently been added to the FDIC's list of potentially troubled banks. Banks that the FDIC wants to change how they prepare for the next banking crisis. The FDIC has NOT said these banks are in trouble currently, but their crisis plan needs to be revised. It's not something you and I have to worry about; we're covered by FDIC insurance. But for Buffett, this is a very big deal. His cash position must remain safe, and the only way for him to guarantee that is to hold cash at a safer institution than the nation's largest banks. So, Buffett's only place for his cash is the US Treasury, where he has 80% of his cash holdings. (The other 20% is in various checking accounts, deposit accounts, and other accounts tied to his business activity.)The Berkshire Annual Report tells us that all its cash is in "T Bills," US Treasury Bills. That makes sense because these are the shortest-term, most liquid Treasury Instruments.T Bills generally mature anywhere from one month to one year. It's relatively easy to build a T Bill ladder of maturities. In a T Bill ladder, you divide up your cash into several different portions, investing each portion in a different month or quarter. Say you have $120,000 in cash. In a ladder, you'd put $10k in each month's T Bill (January, February, March, and so on). That way, you'd have one T Bill maturing each month. You'd then roll it over to the T Bill offering 12 months from now. Simple. This gives you a steady stream of cash (T Bills maturing) and helps you ride the fluctuating interest rates up and down. No doubt, this is the method that Buffett uses to manage his T Bill portfolio. And it's worked like a charm. Buffett has been accumulating his cash hoard for several years now. When he began T Bill, interest was only about 1/4%; today, interest on T Bills is nearly 5 1/2%. Buffett didn't have to anticipate any change in the interest rate; by laddering his Bills, he rolled over his older low-interest bills to the newer high-interest bills as the old bills matured. The same will be true if and when interest rates are lowered. But if all of this seems like too much work or if it's above your budget (you'd probably need about $10k on each step of the ladder), then I'd suggest any of a number of Money Market Funds (Buffett would recommend Government Money Market Funds), savings Accounts, or CDs at a solid bank. Check out bankrate.com for an up-to-date list of the best savings accounts. The Macro View Interest-rates for 3 month T Bill (red), 5 year Treasury Note, and 10 year Treasury Note. Normally T Bills have the lowest interest rate (shortest maturity). Currently the Yield Curve is inverted, this has usually meant a slowing economy ahead (and lower interest-rates). **A note about Wall Street's current view of interest rates: I've included a chart of three maturities of 3-month T Bills, 5-year T Notes, and 30-year T bonds. You'll notice that the interest rate of the 3-month T Bill took off in 2022. This is when the Federal Reserve raised interest rates to fight inflation. Consequently, for the last two years, the interest rate on the T Bill has been higher than the Bond or Note. In Wall Street's parlance, the Yield Curve is now inverted. Interest rates are not as they should be. Longer maturities should have higher, not lower, interest. To the Street, this is a sure sign that the economy will slow, and eventually, interest rates will come down. So far, the Street has been wrong about that. They thought the Fed would reduce rates four times this year. But, the Fed has stood pat so far, missing the first two rate declines. Most Wall Street analysts still believe that the Fed will lower rates, perhaps once this year and a couple of times next year. If they're right, this might be the opportune time to capture these higher interest rates before they fall. **I hope this has given you a basic framework for how Warren Buffett and Wall Street approach cash management. **Current Rates T Bills 5.10% - 5.48% (1) CDs 2.5% - 5.4% (2) Savings Accounts 1% - 5.25% (2) Money Market Funds 2.5% - 5.30% (2) (1) (https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202406) (2) (www.bankrate.com) Follow me here on ThinkSpot for more stories from the ValueSide.
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How the Fed Sets Interest Rates - Rich In...
David Reavill
 July 12 2024 at 03:43 pm
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Senators Walter Mondale, Hubert Humphrey, and President Jimmy Carter shortly after signing the Humphrey-Hawkins Act. ** This week, we were treated to one of the great traditions of the Western World: the Federal Reserve's biannual report to Congress. Always delivered by the Fed's Chairman this year, that duty fell to Jerome Powell. By all accounts, Powell performed most masterfully. A lawyer by training, Powell transitioned easily among the Fed's favorite measures of GDP, Inflation, and monetary policy. Cognizant of his historic role, Powell reminds the Congressmen and Senators, in his very first sentence, that:" The Federal Reserve remains squarely focused on our dual mandate to promote maximum employment and stable prices for the benefit of the American people." It sounds idyllic. Maximum employment and stable prices are a couple of economic conditions that everyone can agree on. We all would like to see as many people employed as possible, and stable prices would be a relief from the current bout of inflation. But have you ever wondered where the twin mandate came from? Or why were these two economic principles, and not some other verity, chosen? We must travel back nearly half a century to 1978 to find the answer to these questions. Jimmy Carter was President, and the country had not yet emerged from what would become the most extended recession of the post-World War II era. Many economists consider the 1970s to be the "lost decade." This time of high unemployment, low economic growth, and inflation led to the invention of the term "Stagflation," which describes the dismal economy of this time. That year, one of the canniest politicians of all time, Hubert Horatio Humphrey, was in the US Senate. For 29 years, Humphrey has roamed the Halls of Washington, having served as first a Congressman, then a Senator, later Vice President of the United States, and now, in 1978, senator from Minnesota. Humphrey had a long record as a classic political liberal and a defender of the working men and women of the country. 1978 would be Humphrey's last year in Washington, and he was anxious to enhance his legacy. Before him were two institutional mandates: the mandate of the Federal Reserve to set short-term interest rates. The second mandate (from the Employment Act of 1946) is for the Federal Government to pursue "maximum employment." Something that the Federal Government was not achieving. From 1970 until 1978, the unemployment rate in the country ranged from 5.5% to 9%, well above what the public saw as acceptable. Humphrey saw an opportunity to offload the Federal Government's responsibility for employment and put it on the Federal Reserve. Killing two birds with one stone, as they say, enhanced Humphrey's reputation as a pro-labor politician while relieving the Congress and President of a task they proved to be woefully inadequate. Congress, both Senate and House, would be all for this new legislation. So, with the help of fellow Democrat and labor advocate Augustus Hawkins, the Humphrey-Hawkins law was created. The Federal Reserve would then report to Congress on its twin mandate, "full employment and stable prices." It's been 46 years since the Humphrey-Hawkins Law was enacted. This week, the Chairman of the Federal Reserve reported for the 91st time on the twin mandate, indicating that the Fed is doing all it can to uphold those two economic realities. It's a Tradition! Like changing the guard at Buckingham Palace or laying a wreath at the Tomb of the Unknown Soldier, the Fed's Report to Congress is a long-standing tradition. But it is a tradition, I fear, that yields little in providing a timely, informative look at the current state of our economy. Timeliness is at the root of nearly all the issues with Fed Monetary Policy. You see, our economy moves at the speed of the internet. The lightning-fast propagation of data moves markets, informs analysts, and impacts our lives. But in Washington, the Committee Calendar sets the pace. So, when Jerome Powell testified before the House and Senate on Tuesday and Wednesday, he relayed the decisions made by the Federal Reserve Open Market Committee on June 11 and 12 a month ago—all based on last month's data—which in today's financial world is surely antiquated. As Powell pulls up his chair and sits before the assembled press and various Representatives, he must present last month's policy decision and underlying data as if it were news, somehow making June's FOMC Meeting Results relevant in mid-July. Now we know why "stand pat" is the most oft-heard refrain from the Chairman of the Federal Reserve. He is under complete restraint. The Fed's Interest Rate Policy has been set for a month now; Powell cannot change that. The Fed was frozen from the moment the FOMC Meeting ended on June 12 until Powell reported those results a month later on July 9th and 10th. All policies are frozen for two months each year, the month before the Fed's March and July testimony before Congress. They cannot change lest the Fed's carefully crafted economic scenarios unwind. While it is true that the Chairman could schedule a "special" FOMC Meeting and change policy mid-month, imagine the "PR" nightmare that would create. No, Powell would rather remain too restrictive than risk any perceived sudden change in policy. Even though unemployment has risen all year, from 3.7% to 4.1%, and inflation (CPI)has fallen all year, from January's annualized 3.66% to June's -0.67, Powell refused to budge: the Fed's policy will remain restrictive. He knows that once your "message" is set, it's best to wait until all the Committees have met before making any change. It's sad, but I fear an authentic commentary on how the United States implements its 1970s Monetary Policy today, in the 21st century. ** Follow me here on ThinkSpot for more stories from the ValueSide.
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