Euro Putting Money Funds in Danger

Posted: Jun 06, 2012 12:01 AM

I can taste it, smell it, and feel it. 

The road show in the U.S., led by such stalwarts as Morgan Stanley, Goldman Sachs, and J.P. Morgan is about to begin. 

That’s right, the same group that brought you Facebook could launch what they will tout as the fixed income buy of a lifetime: THE EUROBOND. 

Let me explain by taking a trip back in time. 

As a child, I grew up next to a train station. 

Periodically, I would cross the street, then the field, and play on the tracks. 

It drove my mother crazy, especially when I took my younger brother and sister with me.  My mom always emphasized the dangers of playing on the tracks. 

We would put pennies on the track and as the train went by, the coins flattened dramatically. 

Then, I would take the flattened pennies to school and sell them for a nickel.  It seemed like a fair trade, one coin for another. 

Candy money was never so easy to come by. 

The danger, however, was getting too close to a speeding train. 

Therefore, I had to be very aware.  After a while, I learned to feel the vibration of the track long before the train was in sight. 

That provided the opportunity to return to a safe distance away from the tracks long before the train was upon us. 

Let’s now transition to the present day.  With Germany and the other AAA countries saying “no” to the Eurobond, it only seems logical that Brussels would turn to another sucker (I mean investor.) 

The collateral behind the Eurobond will be nothing but a wish, a prayer, and a promise.  It seems, however, that all the forces are diverting their efforts in this direction. 

More than likely, the retail investor will shy away from the “investment of a lifetime.”  However, unbeknownst to them, they will probably be invested by the backdoor. 

SEC Chairman Mary Schapiro recently warned that investors were not being fairly compensated for the risks they were taking in money market accounts. 

She also reminded the public that while there were government backstops in place during past financial crisis situations that affected money market accounts, there was no intention of backstopping money market funds for the next crisis. 

In other words, caveat emptor, you’ve been warned. 

It seems rational that money market managers were using individual issues in Greece, Italy, France, and Spain in order to bolster yield.  Therefore, why wouldn’t they buy the consolidated paper of the entire European Union? 

Never mind that the consolidation is fracturing everyday, the only concern for the managers will be maintaining their fees without breaking the buck. 

Thus, if the Eurobond is offered, look for it to be a significant position in your money market portfolio.  For those of you who are all in money market, the safe haven will be shattered in the blink of an eye. 

Mary Schapiro’s simple response will be “can’t say I didn’t warn you.” 

It’s not pennies were playing with anymore, but the danger is just the same. 

Put your hand on the money market track, can’t you just feel the vibration?  It’s time to run for safety.