Monday, November 23, 2020

Yes, It's OK To Accept A "Zero Yield" Environment Now - So Don't Treat Your Investments Like Fodder For A Slot Machine


 Since the Federal Reserve opted to keep interest rates next to zero, there have been one of two responses:  a)  Too many,  now ensconced at home,  have taken to "playing the stock market" as day traders and chasing yield, and b) Others see that we're now in a zero interest world and so reluctantly accept that it makes no sense to chase yield.  

  That last category would be the one  for which Janice and I have agreed to be members.  That means we are quite ok to have our money parked in our joint money market accounts earning 0.30 % a year, and in her T. Rowe IRA in the conservative Prime Reserve Fund.   The 2 accounts in the first have netted us about $680 in interest so far this year, while Janice's IRA has earned maybe $500 so far.   Would this beat inflation?  No, if one reads what WSJ Finance columnist Jason Zweig wrote recently (Oct. 9, p. B1,  'Want To  Keep Your Cash Safe?? It's OK To Be  Zero'), noting:

"Please allow me to point out that $100,000 in a savings account - if you're lucky -will earn you $320 in interest in 2020.    That's $1,508 LESS than you would need to outpace inflation."

Interestingly, Mr Zweig's bank example uses a rate that is about exactly what ours is with our 2 money market accounts.  Are we outpacing inflation?  Nope.  Do we care?  Not really, because our monthly income (in pensions, Social Security)  still exceeds our expenditures by more than $900 a month.  (And that is not even counting the interest earned in the money markets or from Janice's IRA).  So we are not tempted in the least to chase yield, say by purchasing stocks, junk bonds, real estate or mutual funds.   Zweig again (ibid.):  

 "Fooling yourself into thinking you can find absolute safety in any asset yielding more than 1 percent is a terrible idea. We live in a 1 % if not a sub-1% world right now.  Nothing you can do can change that. "

He then cites inflation-protected  U.S. savings bonds earning 1.06 %   and CDs that "earn a pinch more"  but "anything above that comes with risks and risks have consequences".

Yeah, like losing a chunk of your savings!  So no  surprise that "U.S.  investors have amassed $4.79 trillion in money market funds."   While noting "the average money market fund earns a piddling 0.03% in interest income."   

Is this unfair, inequitable?  YES!  Especially when the stock market investors are getting high off the cheap money used to leverage stock purchases because of too low interest rates. As James Grant has observed ('The High Cost of Low Interest Rates',  WSJ, April 2, 2020):  

"Persistently low interest rates have facilitated that trillion - dollar borrowing (and deficits)  as they have the growth of private equity investing , ordinarily with lots of leverage."

Added to that are;  "profitless startups,  the raft of corporate share repurchases, and the unnatural solvency of loss -making companies that have  funded themselves in the Fed's most obliging debt markets."   

By contrast, "For savers in general and the managers of public pension funds in particular, lawn-level interest rates confer no similar gains.  On the contrary, to earn $50,000 in annual interest at a 5% government bond yield requires $1 million of capital.  For the same income at a 1 percent yield requires $5 million in capital."

Adding:  "To try to circumvent this forbidding arithmetic, income-famished investors buy stocks, junk bonds, real estate, what have you.  It works so long as the bubble stays inflated."

But often it doesn't and then the sorry investors or yield-chasing savers get stiffed,  with huge losses.  The most recent example?  The high income households that have bought up high yield municipal bonds only to take huge risks in not collecting. (See: 'Defaults Rise For High Yield Munis', WSJ,  Nov,. 14-15, p. B11).   Noting:  "Fixed income returns that come with a tax break have become so precious to affluent American households that they are willing to overlook a spike in defaults, and growing reports of repayment trouble."   

How did these high end households end up in this position?  They can thank Dotard Trump and the Republicans for their 2017 tax law overhaul which saw "state and local tax deductions capped" - which then drove up tax bills.

The rest of us who are retired and not in the high flier class, just want to preserve our money in so far as we can. After all, at our age one never knows when nursing home care is around the corner.  We hope it isn't, but one never knows.  Hence, the need to be aware of the existing financial environment and not get too greedy for yield.  Say like so many of those who fell for the 12-15% CDs offered by Bernie Madoff in his pyramid -schemes.   Many of these older folks lost their life savings. In the words of one victim, Geneen Roth:

"I do feel that my part in this was my own lack of consciousness about money. ....Would I like to get that money back? Yes!  But do I feel that what I've gotten since losing it has given me more wealth in a way, than anything I had before? Yes."

Well, the rest of us prefer not to wait for a Bernie Madoff encounter to learn our money lessons, and especially when to be a  "Zero"  in an environment not conducive to yield.

No comments: