I was on the phone the other day with a friend, who is also my accountant. We’ve been friends going on 30 years. Once in a while our discussions will veer off into what is commonly known as “shop talk” where we find we’ve suddenly gone from “just gabbing” to a multi-hour intense conversation about markets, the economy, and more. This past one was a little more of “the exception” rather than just the average swing into the generic.
What I discerned from many of his responses was just how inadequately prepared, justifiably frightened, as well as, an overwhelming sense of foreboding was lying right below the surface of those many might deem from the outside looking in as people of wealth, industry leaders, or people who are just assumed to be “well off.”
What was just as illuminating was how many he explained “are just rolling the dice, thinking nothing could be as bad as 2008.” The additional problem? They think (or believe) if it happens again all they’ll have to do is the same as they did last time e.g. Hunker down, wait for the storm to blow over. Rinse, repeat.
The problem (in my opinion) with that thinking is this: What you think you can do this time, has already been severely handicapped or, removed all together. And most have no clue.
This is where the real issue lies for not only the Fed. per se, but rather, the entire political as it is currently known. For if a “black swan” does indeed hit once again in the very near future? Once people realize just how systematically they’ve been cut off from those “assumed” resources, especially during a crisis? All hell is going to break loose in ways the academic class, as well as, the political never envisioned. For when the time comes (and there is no more important “time” than that during a crisis of confidence) where words truly matter, and everyone no longer believes? Everything changes. And I do mean: everything.
The subject which initially fueled the discussion to take off was when I cavalierly made a comment of, “I’ll bet you haven’t even noticed the change on your latest deposit slip from the bank?” To which of course he said, “What change?”
I relayed the fact that if you now deposit cash (and “cash” means just that: cash) into your account as per the deposit slip it now reads “Further review may result in delayed availability of this deposit.” (this incident was at Chase™ I’m quite sure it’s at others, and if not, will be coming soon to a bank near you)
Or, said differently: “Just because you deposited cash, it no longer means, or can be inferred, as an instant credit to your account which has been the case for years. And that’s a real problem many business people, never mind, your average person are going to find out the consequences of the hard way.”
Why is this such a problem? I’ll use myself as the example, but I know I’m far from alone.
I don’t use them (as in banks) or a lot of other “payment” or “money” systems the way in which so many do today. Call me “old school” or “Neanderthal” all you want; but I’ve had many a (for the sake of politeness) “less than thrilling” experiences or dealings with banks over my business and personal career.
What a few of us (i.e., old timers) still do is to actually either carry some cash on us. Or, have a little “on top of the fridge” for those just in case moments. Not some vast sums. Just what used to be known as “walking around money.” For if I go to a store I don’t know, or a flea market, fair, or other such venue. I want to pay in cash rather than give my card and turn my account info over to someone I have no clue about. Yes, they may never use my card in nefarious ways, but there’s a whole lot of money to be made in selling that info to those that will. And once you’ve had your cards compromised (which I have) much like contracting seafood poising (again, which I have) – it only takes once to never allow it to happen again.
So with that said, I like many others also keep a very close balance when it comes to a debit or checking card and keep a running tally of my expenses as to know, and keep, me away from an overdraft. There are always times where you run things a little close, or make an impulse buy and the balance goes a little too low for one’s comfort level. As was always the case I would just hop over to my local branch and make a deposit. However, just a few months ago something changed.
It was a late Saturday afternoon when I felt my balance was a little too close and decided to deposit a few hundred dollars (actually $300) to give me a more comfortable cushion. For I had some outstanding checks and pending charges still floating and didn’t want any headaches. Guess what? The ATM wouldn’t let me do it. After several attempts I finally figured out it maxed out at $260. And that’s all I could deposit.
Why that number? I have no clue but can only assume (and for an assumption I think it’s as good as any) $260 is just about what a person earning $10 an hour working 40 hours would be in take home pay, there about, after taxes. Anything above that? You must have received it by nefarious means. Or, at least that’s the now implied assertion because when I went back to the bank on Monday to make the rest of the deposit? I was instructed I needed to show my ID (even though this was my local branch, not my first visit, she had my card, my personalized deposit slip, and my account open!) to deposit the rest. I was informed “all cash deposits now require a picture ID.”
So why is this little “inconvenience” such a big deal some might ask? After all as the saying goes “get with the times!” Ah yes, about those times…
How about those times when you suddenly find yourself overextended in your account yet – you have the cash in hand to cover it? Oh, oh; better hope it’s not a time when you’re instructed to use those delightful 24hr accessible ATM’s because the bank is now closed.
Let’s say you have just $3K in checks outstanding for you just wrote out the monthly bills via checks but you just can’t remember when trying to reconcile your current balance if you accounted for that $300 purchase the week prior. Guess what? You’ve got a problem. And more than likely – many more, as in compounding fees and such. What might be just as big a problem? You probably never knew there could be one to begin with until you just read this. And if you are one of those that never knew? That alone should show you just how problematic things can get if there is another swan styled event.
“Well that’s just for people who don’t want to take part in today’s modernized systems” some will say. Well yes, some will say that. But what “they” say is irrelevant and inconsequential. For the very act of thinking that way shows just how naive they truly are. Let me use another example to expand only we’ll use a business example.
You’re running a business and everything is going fine. Then, out-of-the-blue, one of your most trusted, as well as, important customers calls you on the phone late Saturday afternoon to inform you the latest payment (as in check) that you deposited on Friday is no good as in: It will bounce at Monday’s open if its processed.
This has never been an issue before and you’ve been dealing with this customer for years. So clockwork like are their payments you have built the habit of mailing your own accounts payable on Saturday afternoons at the local post office. All those “payables” by the way are based on those funds clearing that Monday as they have week after week, month after month, year after year.
Now here’s the conundrum: Good news! This customer knows what it is to be in your shoes for they’ve been there themselves. They inform you to “swing by and they’ll make the check good via cash right now.” Your problem? Your bank ATM just might not let you deposit it. Or worse, even if they do? Remember that little new added comment that now appears on your deposit slip? For those who need reminding: “Further review may result in delayed availability of this deposit.”
So, even if you get the machine to accept it – doesn’t mean it’s going to be “available.” Remember: we’re talking cash – not a check. Now: cash has to “clear.” Think an “academic” who’s never started or run a business understands this scenario, or has contemplated its plausibility? Hint: No.
My accountant was stunned. Not only did he not know, but what he expressed most concernedly was that he could only assume: neither does anyone else. For he works exclusively with either business entities or high net worth individuals. And to his bewilderment he was utterly shocked on how this (and its varying scenarios) had slid under not only his own radar, but most assuredly, under everyone else’s. (which by the way is also why we talk)
You could find yourself racking up fees (as in bounced checks both coming and going) and giving reasons for automatic “dings” to your credit report, all while you not only have the cash to cover it, but also; deposited that very cash into the bank all before the funds against them were applied for payment.
The above scenario can apply to either a business, as well as, your average bank account holder. And most don’t even know it. What’s worse? Those that say “get with the times” don’t assume that one of those checks that “might not clear” could in fact be their own pay check.
Far too many in the U.S. forget most people are employed by small businesses – not some XYZ conglomerate. The above business scenario is more likely to happen, and the risk keeps getting elevated with every passing day. If you want an analogy I’ll put it this way: The portending tail-risk of an extreme event has surpassed fat-tail and is now swinging to and fro beneath “the rocker” of the Fed Chair’s next policy edict.
As I said earlier “this was what fueled the start.” As we delved deeper it became increasingly obvious just how much was transpiring at such a rapid pace that it was nothing but a blur to even those who consider themselves “well abreast” of most financial matters when concerning business or wealth.
Another of the points raised was that concerning “the money markets.”
As I’ve implored so many times “if you want to look for clues, keep a keen eye to anything pertaining to the money markets.” (MM) And during this discussion the MM came up as usual when in passing he told me that some of his clients had either sold out some or all of their interests and were squirreling away most (if not all) of their proceeds into the MM because they were just too scared as to do anything else. (For those wondering; we would never get specific with any names of either a business, or individual. Everything is always in the general, as it should be.)
I swore I heard either the phone hit the floor, or, maybe it was his jaw when I asked: “Did you see where money in your MM is now a bond rather than cash?” Once again to which he replied, “What!?”
I reiterated the story of how the rules were changed in the MM as to now they could be “gated.” However, it seemed to really make quite the impact when I followed up with, “And you do know that many brokerages are now putting (as in forcing) those MM funds people still believe are far more liquid than they currently are into “U.S. government securities” right?” It was then the phone seemed to go silent for a bit when another “What!?” came forth.
Here is where I reiterated the story (using Schwab™ as just the latest) at the beginning of this month (e.g. May) announced it will “…invest at least 99.5% of its total assets in cash, U.S. government securities and/or repurchase agreements that are collateralized fully by cash and/or U.S. government securities; under normal circumstances, at least 80% of the fund’s net assets will be invested solely in U.S. government securities including repurchase agreements. ”
So what’s to worry about, right? I mean; who cares about whether or not you need access to funds immediately if for the sake of “protection” you can be denied access to them but the balance will remain the same? That’s not a play on words – read it again and you’ll start to understand just how this will be framed if (or when) the next monetary crisis comes swooping in the wings of some rather ominous looking bird.
As I iterated to my friend:
“Just how many do you think are opening their statements, or looking at the last email notice from their broker where such a statement is made and not only not-reading it, but rather, understand the implications of it?
I’d wager dollars-to-doughnuts less than 25% of recipients will ever read it, and less than single digits of that even understand its implications. After all, you of all people know first hand just how many people throw their statements in a drawer and don’t open them till you see them 3 days before tax day. Now imagine them finding out what you now know in the middle of a crisis? Of any size. Imagine their reactions to suddenly find out what they “believed” was available to them (as in cash) was actually not only not-readily accessible, but actually, may be denied for who knows how long?
Forget days or weeks. You could be talking months or years depending on the severity. What do you think will be the reaction then? Think it will cascade? Don’t answer that, I’ll do it for you – you know it will. And it won’t just be fast; it’ll be more like light-speed. People will absolutely freak! Everything will grind to a halt. The only unknown after that will be – for how long?”
The above is just a few of the topics we discussed. There were many others with just as impending disruptions which could affect businesses in general. For what many people forget is this: if the business community grinds to a halt – everything shuts down. And I do mean just that: e-v-e-r-y-t-h-i-n-g.
And it is here where the academics within the Ivory Towers are going to find themselves in a quandary they have yet to experience.
Just when people will need to believe and trust what is being told to them within times of crisis, is precisely where they’ll (as in the Fed. or other monetary officials) will find the more they speak or promise – the more people will not only tune out, but maybe turn on them. For they’ve been told and sold these past 8 years “The Fed. is omnipotent.” So if that is true – than how did another “black swan” event happen to begin with is all that will be on everyone’s tongues.
That’s when much like geese – once you see one land, rest-assured, the flock is right behind. Along with the ensuing mess they’re sure to leave.
© 2016 Mark St.Cyr