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The Forced Migration to Risk


Retail investors driven out of risk-free assets.

I have repeatedly used the expression "the Trail of Tears" to describe what I expect will be the forced migration of retail investors out of risk-free assets into riskier investments.

Well, I was just sent a backpack.

In the mail this week, I received a notice from one of our country's leading trust banks informing me that, "due to unprecedented market conditions," the US government money-market fund in which I am an investor may hold some or all of the fund's cash in interest-bearing accounts with the bank (or other banks) insured by the FDIC only up to $250,000.

They also sent the same notice to investors in their tax-exempt money-market fund as well.

Contrary to what money-market investors may believe, these kinds of changes can be made without investor consent or approval. And, with most money market investment managers scrambling for yield, I expect others to follow - if they haven't done so already.

But beyond the "bait-and-switch" forced migration to risk, what troubles me most is the potential for self-dealing. At a time when banks are scrambling for funding, that "affiliated" money managers can so easily move client money into uninsured deposits is deeply discouraging.
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