Commonly-held financial wisdom is that everyone should have 3 to 6 months worth of expenses readily available in cash as an emergency fund. This might take the form of a high yield savings account, money market fund, short-term bank CDs or other high quality, liquid financial instruments.
And while this is sound advice for the average household, art and antique investors would be wise to go the extra step when building their emergency funds.
Why do I suggest this?
That’s simple. Art, antiques and other tangible assets can be some of the most lucrative investments currently available to the average person. But they do have one big downside; they are almost always extremely illiquid. This means they have wide spreads between their bid (selling) prices and ask (buying) prices.
So if you need to sell your prized antique collection on short notice to raise much needed cash, you will likely be disappointed in the prices you receive. And this little tidbit of advice is doubly true if you happen to be trying to sell illiquid art and antiques in the midst of a severe recession.
That realization brings us to my next point. Some of the most reliable economic indicators point to the high probability of a recession in the United States within the next 12 to 24 months.
For example, U.S. job growth in May of 2019 was only 75,000, well below the 200,000+ that is typical of a robust economy. Durable goods orders have also been uncharacteristically weak.
But the real tell is the U.S. Treasury yield curve. This respected economic indicator is massively inverted right now, with the 3-month T-bill trading at a whopping 35 basis point premium to the 10-year Treasury note.
Graph of the 10 Year U.S. Treasury – 3 Month U.S. Treasury Spread
This is a highly anomalous situation. Under normal circumstances, the yield curve gently slopes from the lower left-hand corner of a chart to its upper right-hand corner. This means that shorter dated Treasury securities typically trade at lower yields than longer-dated Treasuries. An inverted yield curve, where short-term Treasuries have higher yields than long-term Treasuries, is a surefire sign of financial trouble ahead.
The upshot of all these economic statistics is that something wicked this way blows. If you don’t have a healthy emergency fund right now, then you need to get one in a hurry. And if you happen to be an art or antique investor, you need to have a fatter emergency fund than most other people.
How much fatter?
I think it makes sense for tangible asset investors to stash anywhere from 8 to 16 months worth of household expenses. This is more than double the level typically recommended for the average family. So if you have expenses of $3,000 per month, I believe keeping anywhere between $24,000 and $48,000 in readily accessible cash is a good idea.
This might seem like an impossibly large sum of money to the average person, but there is a method to my madness.
You see, the next recession we experience is likely to be beyond anything within living memory. The global “Everything Bubble” has distorted our economy into a grotesque parody of a properly functioning market. This has lead to the rise of disruptive profitless prosperity companies, like Uber, Netflix, Tesla and WeWork. But these bubble companies are completely dependent for their survival on investors throwing ever greater sums of effectively free money at them.
As the economy slows down, that is becoming an increasingly unlikely proposition. Consequently, over the next few years we are likely to see massive job losses, widespread corporate bankruptcies and a crashing stock market. In other words, we will experience a mega-recession.
As an investor, it is critical to avoid a situation where you are forced to panic liquidate your treasured art or antiques collection into a brutal bear market. This is why it is vital that you build yourself a healthy emergency fund before the financial maelstrom hits.
So where should you put your cash stash?
While FDIC-insured savings accounts and bank CDs are perennial favorites, I favor brokered CDs at the moment. These are bank-issued, FDIC-insured certificates of deposit that can be bought and sold through your brokerage account, just like a stock. So you can sell a brokered CD before its maturity date if the need arises (although you may receive more or less than you originally paid, depending on whether interest rates have fallen or risen).
This is important because it is highly likely that the Federal Reserve will be cutting rates in the future, rather than raising them. So while savings accounts, T-bills and money market funds will pay less interest as time goes on, a brokered CD with a maturity date several years in the future will continue to pay today’s higher interest rate right up until maturity.
As an added bonus, banks are relatively cash-starved right now, leading them to offer much higher interest rates than you can get on a comparable Treasury security. For instance, the 5-year Treasury note is currently paying around 1.6%, while brokered CDs with comparable maturities are paying 2.2%. The 60 basis point pick-up a brokered CD gives you over Treasuries is significant.
Another intriguing possibility for your emergency fund is inflation-adjusted U.S. savings bonds. Series I savings bonds pay a fixed interest rate that is then modified for movements in the consumer price index. Now, normally I hate savings bonds as an investment, but using them as a cash-alternative is the one situation where I think they excel.
Right now I-bonds are paying a real (inflation-adjusted) interest rate of 0.5%. This might not seem like much, but it is actually quite good once the inflation component is factored in. It is the highest rate these financial instruments have offered within the past decade. It also beats out the real interest rate available on government TIPS (Treasury Inflation Protected Securities) out to a maturity of 30 years!
As an added bonus, U.S. savings bonds are tax-deferred, with no tax liability on the accrued interest until the bond is redeemed (which can be as long as 30 years). And because they are obligations of the Federal Government, any interest earned is exempt from both state and local taxes.
The downside is that I-bonds are not redeemable for the first 12 months after purchase, so make sure you have some other cash available if you plan on adding I-bonds to your emergency fund. There is also a penalty equal to the last 3 months of accrued interest if the bonds are redeemed before 5 years has elapsed. And purchases are limited to $10,000 for each individual’s Social Security number per calendar year.
Despite these drawbacks, I think I-bonds are a great way to pad out an emergency fund. They provide competitive interest rates (currently 0.5% real + 1.4% inflation = 1.9% total) that are resistant to declines in the Fed Funds Rate, while also providing perfect liquidity (once the 12 month no redemption period has expired).
You’ll have to hurry if you want in on the action, though. The fixed, real interest rate on newly-issued I-bonds is adjusted every 6 months (on May 1st and November 1st). And the current 0.5% rate is sure to be adjusted down on November 1, 2019. So load up while the rates are still high!
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I would be remiss if I didn’t mention the final candidate for a well-capitalized emergency fund: gold. Gold is the most liquid of the precious metals with a bid-ask spread of typically no more than $1 a troy ounce. It can easily be bought or sold anywhere in the world. And it is immune to the ravages of inflation and currency debasement.
Gold is the epitome of financial stability in our bubble-addled economy.
Global central banks, including the Chinese, Indian and Russian central banks, have been loading up on the precious yellow metal for the past several years. They know that a financial debacle is coming and that gold is the ultimate money. So holding a little gold in your own portfolio might not be a bad idea, either.
Of course, if you already have a healthy emergency fund, then by all means consider putting more money into your art and antique investments. These desirable tangible assets will undoubtedly be some of the best performing investments over the next couple decades. Just make sure that you have enough cash in your emergency fund to weather the financial storm that is sure to come.
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