Tag: economy

Stop worrying about the Federal Reserve

There are lots of people fixated on trying to figure out what the federal reserve is going to do with interest rates and when they are going to do it.  If you are a retail investor, you are not going to beat the professionals in that game, so stop trying.  Instead, let the pros handle it and relax by looking at the view from 30,000 feet.  Here’s what the bond experts at Oppenheimer are telling us in a messge titled Why Fed Watching Is Likely a Waste of Your Time

What to Remember for the Long Haul

For long-term investors, I believe there are essentially five important points to keep in mind.

1) Overall global economic growth is slow but most likely the worst is over. While there may be hiccups every so often, it is unlikely that we will revisit the financial abyss in the near-to-medium term.

2) Real interest rates are quite low. Over any reasonable investment horizon, they are going to go up. That is true irrespective of what the U.S. economy looks like this quarter or who the next Fed chair is.

3) Because interest rates are so low now, the likelihood that returns from any part of the bond market will get you to a comfortable retirement based on their real returns is virtually zero. You most likely have to have a significant portion of savings in assets that provide better real returns, albeit with greater risk.

4) That said, you can’t just put all your money in stocks. There will be future periods of equity underperformance. In order to make sure you don’t panic and go all cash at the worst point in the cycle, have some part of savings devoted to bond or bond-like instruments now. Even if they aren’t generating a lot of income, those investments may provide protection during equity downturns, which is as important.

5) Income, not price appreciation, is typically going to be a significant part of overall returns. Therefore, wherever you can, and whatever risks you are comfortable with, seek out income-generating investment options. As always, past performance does not guarantee future results.

Good advice.

Federal reserve surprise

The highly regarded Art Cashin commented on the announcement coming from the Federal Reserve that it would not begin “tapering” its bond buying this month.

The financial media has joined the trading community in speculating about possible damage to the Fed’s “credibility” from its no taper decision.  The question is based on the process.  In late spring, Mr. Bernanke floated the idea of gradually reducing the Fed’s QE purchases and, ultimately, ending the program – possibly as early as the middle of 2014.  In the following weeks and months, various FOMC members (voting and non-voting) opined on the matter.  The collective impression was that tapering would begin by yearend (and before Mr. Bernanke’s term ends in January).  The media odds-makers generally moved toward September as the likely start. Instead, the FOMC opted to stand pat in September.  Shocked markets around the world reacted violently.   If the Fed was moving toward a delay of tapering, why was there no intervening “guidance”?  Traders now speculate that the FOMC may have made up its mind at the meeting itself.  If so, was there some last minute economic data or development that moved the FOMC away from a decision that was broadly expected by markets around the globe (as demonstrated by the sharp and sudden reactions that followed)?   That could make the Minutes of the meeting very enlightening – unless they are heavily laundered.  We await with great anticipation.

And here’s a brain teaser:
An ancient Roman Puzzle – “Start with five hundred, end with five hundred just five in the middle will be.  Between them shall be a first of numbers and of letters to give ye the name of a great king.”  Who is it?

A Deposit In A Bank Is Not A Riskless Form Of Saving

This is a good time to remind our readers of something.    Via ZeroHedge

Cyprus has reminded us of a couple of awkward truths:

  1. A deposit in a bank is not a riskless form of saving.We may not see eye to eye with the FT’s Martin Wolf on many aspects of modern economics and central banking in particular, but he described banks well last week:
    “Banks are not vaults. They are thinly capitalised asset managers that make a promise– to return depositors’ money on demand and at par– that cannot always be kept without the assistance of a solvent state.”

  2. When states become insolvent, the piper must ultimately be paid. Fatal, embarrassing insolvency is not a problem that can be perpetually or painlessly deferred.

Why do we have FDIC?  Because banks can fail,, and when they do, without someone else like the FDIC, depositors can lose part or all of their money, which is what happened in the Great Depression of the 1930s.  For a lesson in banks, watch “It’s a Wonderful Life.”

And even if the bank does not fail, if the interest they pay does not exceed inflation after taxes, the money in the bank is worth less over time because you can’t buy as much with the money as you did in the past.  The simple truth is that there is no “safe” place for money, even under the mattress.  Whenever you have money there is risk of loss.  Cash can be stolen.  Banks can go bust and investments can lose money.  For serious money, get professional help.

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