I am a thrifty soul at heart. Despite having invested quite a bit in enterprises that failed to return anything or cost me a lot, and despite having lost everything in a business just two years ago, I have the capacity to set a little money aside for the future (i.e., retirement -- I am, after all, 64), and the discipline to leave it alone.
But I think I'm pretty much stuck in one of those groups that are looking at the economy, as ravaged by six years of Obamanomics, and wondering exactly how to save. No, not wondering how much of my income I can set aside, but literally, where to put it.
The baseline for comparison, of course, is cash under the mattress. If you put your savings under your mattress, and are fortunate enough to have it still there when you come to get it some time later, you will find that its value has eroded only to the extent of inflation over the intervening period. You paid no fees to "invest" it, and if inflation plods along at a relatively low rate, well, you didn't lose it. If you put it into a no-interest, no charge checking account like at a credit union, same deal.
So the baseline is simply to lose nothing worse than the going inflation rate. That is not going to help you in the long term. Duh.
So where, then, do you go? In my lifetime, bank savings accounts have been all over the place. They were, I want to say, maybe 3% when I was a kid in the '50s and '60s. Although they were higher than that it the Carter era of the '70s when inflation was rampant, today you're lucky if a savings account pays a single point or maybe one point and a fraction.
The old CDs -- the certificates of deposit that let you get a slightly higher rate than a savings account but forced you to keep the money in the account for a period of time -- are still around but you can't get anything for them. For fun, I checked a credit union I belong to -- credit unions have pretty much the best rates available since they're member-owned.
Their best savings rate requires you to stash the cash for five years. Want to guess what rate you get for putting your money aside for five years? You get 1.98%. That is not going to match projected inflation.
So the obvious alternative is to invest. Now, investment implies risk, and there are certainly no investments as reliable and insured as a relatively benefit-free savings account (or, for that matter, the baseline mattress, fires notwithstanding). Stocks go up or down, and as I write this, the market, as reflected by the Dow Jones average, is up at its area of historic high.
But why? Naturally, our president often points out that the market is at historic highs, knowing that the public is going to be sufficiently under-educated on economics to be unable to understand why. "You see", our fearless leader cries, "My policies are leading to economic success."
What he fails to mention is that there is simply no place else to put one's money than the market, which drives up demand and therefore prices. Duh again. There's no place else to put one's money than the market, because Obama's Federal Reserve Board, nowhere near as "independent" as we'd wish, has dropped interest rates to effectively zero. Banks can borrow all the money they need and pay next to nothing in interest.
Since the money is borrowed by banks with no interest, they can lend it at low rates, which is nice if you need, say, a car, but not so nice if you are trying to save. Since the banks can get cheap money, they also don't need to pay you interest for yours, which keeps savings interest rates dismal. Dismal savings rates force the nation's savers to put it elsewhere -- hence the 18,000 Dow, where it has been for months -- 17,925 as I write this.
So ... the stock market. Let me ask you this -- how much do you trust the market as a medium-term investment? Stocks are subject to the same supply-and-demand pricing impacts of any other asset, but they're also sensitive to the underlying value of the company. Companies do well and make profits, and their price goes up to reflect their true value. Other companies may only do OK, but get invested in because at least they're a better choice than savings accounts, and their price goes up because of demand.
Let's say I've got some of my life savings, and I want to put it where it will grow at a reasonable appreciation rate -- 4-6% or so. How do I know if a stock which has appreciated over the past few years has reached its current price more because of its fundamental quality (meaning it should continue to go up and is a good investment), or because investors ran to it by comparison to an inert savings account?
I ask this not just because I would be an investor of savings as my family builds financially, but because I expect, as do most, that the Fed will finally start to raise interest rates as Obama's influence wanes in the cold December of his miserable administration. As the Fed rates rise, savings rates will creep up, at least some, which will make savings accounts a less putrid alternative to the mattress.
But whither the market then? Will the fundamentals of USA corporations be strong enough to sustain their current prices when money flees to the more stable savings options? To what extent has the huge run-up of stock prices (that appears to have flattened) been accountable to corporate strength, and to what extent has it been the utter lack of an alternative?
Finally, there is this -- one of the reasons for perceived corporate strength (and its effect on stock prices) has been that businesses have been hoarding cash, retrenching, trimming costs and cutting staff. Why? Because it is so expensive to hire, and so difficult to fire, that personnel is seen as a cost to be controlled heavily. It's better to have three higher-skilled employees than four less-expensive ones.
As far as the fundamentals of companies go, how much of their financial stability, how much of their profitability, and how much of their predictable future is already baked into their stock price? How much of it is because, out of distaste for Obama's policies, antithetical to business and costly, business has reorganized, trimmed and moved to cost-cutting policies like telework, and what does that say about its value in, say, 2017?
All that is by way of saying that I've got no idea whether to put my savings back under a mattress, or decide that these retrenched, reorganized and more efficient businesses are going to be where I want my money when we finally get a Republican in the White House. What if the innate value of the Dow is more like 15,500, and the difference is from money fleeing from 0.000003% interest rates?
If you have the answer, well, there's an empty Comments section below -- and I have a mattress.
Copyright 2015 by Robert Sutton
Like what you read here? There's a new post from Bob at www.uberthoughtsUSA.com at 10am Eastern time, every weekday, giving new meaning to "prolific essayist."
No comments:
Post a Comment