What more can i say the Yankees win. Congratulations to the new york Yankees. great job on beating the cheese steaks of Philadelphia.
And here is a great article about saving money. Is it all that and then some. Or should we throw all of our money in the mattress. The stock market is up and down these days so be careful out there. Check the article.
Why saving is for suckers
Your bank, with help from Uncle Sam, is making obscene profits at your expense. Instead of funding the fat cats, here’s how to join them in the economic recovery.
By Jon Markman
If there’s one thing that seems like it has to be a good idea, it is saving money. I mean, it’s like walking grandmas across the street, eating hot dogs on the Fourth of July and rooting against the Yankees, right? A concept that seems above reproach.
Yet the reality is that in times of low interest rates, a credit bull market and a steadily advancing stock market, socking income away in a savings account may be the dumbest idea in the world.
In fact, I’ll go one step further and say it flat out: Saving is for suckers.
The reason this is true explains a lot about where we are in the business cycle right now and how the banking establishment and government conspire to rip off the public at every turn.
The truth about saving
Here’s the deal: When you put a portion of your income into a savings account, a money market fund or a certificate of deposit at a bank or brokerage, it appears from your perspective that you are placing it in a vault for safekeeping. But the truth is that you are lending your money to the bank at a rate of about 1%. The bank then laughs behind your back as it turns around and lends it to the government for 4%, to big companies at 6% or to smaller companies for 8% or more.
The difference between what the bank gives you for your cash and what it earns from lending it out at higher rates is called its “spread,” and it amounts to the bank’s profit margin. That spread right now is so large — as wide as 8 percentage points — that even many stupid bank executives could not avoid earning huge profits this year.
Mind you, there are some bankers who are so lame that they won’t make money. But for the most part, the profitability of banks right now is so obscene that any tricks they pull in their earnings reports this month will be intended not to hide losses (as bears would have you think) but to hide their gains. A steep yield curve — which occurs when short-term interest rates are very low relative to long-term interest rates — is a direct pipeline from your savings account to bankers’ bonuses.
There is a way for you to halt this robbery and redirect the process in your favor. But before I get there, let me note that the cover story for this mass misappropriation of the public’s money is quite simple and may actually have a positive purpose.
A spin on the credit cycle
The government wants banks to become as profitable as possible now, after their incredible screw-ups of the prior few years, because to the extent that they can regain their balance by siphoning income from their customers, they will not need to hit up Congress for more emergency relief funds. Thank goodness for small favors, right?
It’s a little hard to comprehend at first, but let me tell you how the credit cycle works, according to independent credit analyst Brian Reynolds, and then I’ll tell you how to intervene:
- First (in this case, from 2003 to 2006), you have a normally strong economy and equity bull market. Banks make loans to companies, which use the proceeds to expand, and all is well in the realm.
- At some point (2007), banks get crazy and lend too much, and companies and individuals go crazy and expand too much, until eventually borrowers can’t pay their debts and a credit crisis ensues.
- As cash flow tightens (2008), companies turn to low-cost lines of credit they obtained from banks during better times but never used, and banks are forced to lend them at below-market levels, weakening their structures.
- The central bank cuts interest rates, giving commercial banks some breathing room. Banks then spend the next year (2009) reducing loans to the public and less-creditworthy small companies as they bolster their own broken balance sheets via the carry trade, which is that pipeline from consumer savings accounts to their own treasuries.
- As banks cut back on loans to everyone (2009), companies then turn to the bond market for cheap funding. Banks don’t mind, because they are fattening up by borrowing cheaply from the public, which has been stampeded and scared into stowing income in savings accounts.
- The Federal Reserve eventually raises interest rates, killing the value of the carry trade (late 2010). Only then do banks start to make commercial and industrial loans, then loans to the public.
- Banks ultimately become more competitive with each other and the bond market and then start to go crazy again, issuing loans to any business or individual with a pulse, and that’s when the credit cycle really goes nuts again (2011 to 2012).
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Why saving is for suckers
Continued from page 1
Central bankers and government officials have been trying to make the public think they are going to end the first part of this crazy game soon by raising interest rates as soon as the economy shows a hint of stabilizing. That is why Federal Reserve chief Ben Bernanke and his band of regional Fed governors have hit the lecture circuit in recent weeks to give speeches at a stunning pace. But their comments are really just a smoke screen, as I have mentioned before, because these guys really have no intention of raising rates until substantial employment growth has been under way for several months, and that might not happen until the end of next year at the earliest.
A simple plan
Putting it all together, Reynolds thinks the evidence suggests we are still in the very early stages of the credit cycle, similar to the first seven months of the 1991-2000 period or the 2003-07 period. In those time spans, people who were simply saving excess cash in passbook or money market accounts at banks were throwing money at bankers with virtually no tangible benefit to themselves.
Different times call for different strategies. Last year you were a sucker if you were long on stocks. This year you’re a sucker if you’re not. My suggestion is that you participate in the recovery of the global economy right along with the fat cats, instead of serving as their financing vehicle. Despite the recent advance off the March lows, stocks and corporate bonds are still inexpensive relative to the sharp recovery that likely lies ahead.
I’ve written a lot of columns over the past seven months with specific recommendations. But if you haven’t started yet and want to get involved again with stocks — after all of your family, business and tax requirements are met, of course — then consider starting with a very simple strategy first and adding more complexity later.
A good, inexpensive exchange-traded fund to start with is Vanguard Total World Stock (VT, news, msgs), with an expense ratio of only 0.3%. It gives you exposure to all large and medium-sized companies in the world’s developed markets. To add a little more risk — and thus, hopefully, return — add small companies with SPDR International Small Cap (GWX, news, msgs). To creep out a little further on the risk spectrum, add iShares Emerging Markets (EEM, news, msgs). And finally, to add bonds as ballast, add iShares Investment Grade Corporate Bond (LQD, news, msgs).
Keep it simple. Adding sectors and specific regions will increase the complexity of your portfolio but probably won’t add much more in returns, which could well exceed 15% per year after the recent crash in value.
These are not buy-and-hold-forever ideas, because cycles will change. And they won’t go straight up. There will be long periods of sideways motion or bumpiness. But the fiscal and monetary stimuli poured into the global financial system over the past year, as explained two weeks ago, will more than likely lead to a prolonged recovery of at least a year and more likely two or three or more.
For that period, investing will get you a lot farther than saving.
To learn more about WJB Capital Group analyst Brian Reynolds, visit his company’s Web site. To learn more about Vanguard ETFs, click here. To learn about iShares ETFs, click here. To check out my daily investment newsletter, featuring active ETF and stock portfolios, click here