Satyajit Singh's  Instablog

Satyajit Singh
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MBA, University of Chicago, Graduate School of Business --------------------------------------------------------------------------- I am a disciple of Benjamin Graham and use his 'margin of safety' principle in investing. It is insightful to see how people such as Prem Watsa, Seth Klarman and... More
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Singh Investment Funds
  • Euro And The Money Market Funds 0 comments
    Jun 20, 2012 6:14 PM

    The Euro (currency) just escaped from being fallen of the cliff. Greeks marginally saved it. But can Euro really be saved. I doubt it. The main reason being lack of central authority to guide fiscal and monetary policies.

    But with all the bashing of EU and the Euro, the numbers do not paint such a clumsy picture. The current account is positive while the budget deficit is at -3.4% of the GDP (US on the other hand has -$474 Billion current account deficit and -7.6% of budget deficit). This comes to a point that EU is actually doing a good job. Germany, with a stick, is a firm believer of austerity and any Keynes model has no role into the German's mindset. Keynes model works briefly in the initiation phase and its effect dies quickly as the economy lingers in recession. Japan is a perfect example. Its important that structural changes should happen. The public sector should be dismantled and streamlined and policies favoring the private should be initiated. Germany is making sure that such policies are enforced in each of PIGS (Portugal, Ireland, Greece and Spain).

    Thus it gets me to the point that companies in EU are actually faring better day by day. All the negatives have been priced and one can get a currency leverage if one buys an ADR. Blue chips with 7% dividend yield are being auctioned daily in the market. In US, especially the Money Market Funds have been the pain point. These funds have 13% exposure to European Banks (which are currently asking for bailouts) and may be the exposure can be more if one considers that the Deutsche Bank has an exposure in PIGS and the Money Market Funds have a big exposure to Deutsche Bank.

    Now lets see the mass scale rip off the financial institutes such as Fidelity have been committing. These are the big boys who manage the money market funds. Lets consider an example:

    Money Market Fund = $1000

    Return on the fund = 1%

    Expense = .65%

    So institutes such as Fidelity invest in European Banks (which are at brink of collapse) in the name of Money Market funds, get a measly 1% and then take 65% of the return. In the above example Fidelity takes away $6.5 out of a return of $10, leaving only $3.5 to the investor. Mind you, its the investor who takes the risk. If the European Banks collapse, Fidelity will still ask for .65% and all losses are investors problem.

    This gets me to a point that money market funds are actually not so safe at all. Invest wisely and always watch out.

    Happy hunting!

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