Bob Carlson

The Federal Reserve’s been punishing savers in favor of the big banks and others by keeping short-term interest rates dirt low since 2008. Investors in safe investments (such as short-term treasury bills, money market funds, and certificates of deposit) are earning less than 1% annually. After taxes and inflation, the real return is negative. Some savers respond by taking more risk, such as by purchasing high yield bonds.

A better approach is to take a look at checking accounts. High-yield  or reward checking accounts, as they’re called, yield an average of 2.56% annually (compared with 3.3% last year). The highest yield currently is over 6% offered by the Boeing Employees Credit Union in Seattle.  On www.bankrate.com, you can find a survey of the latest details and yields. The web site found 57 high yield savings accounts, and 27 of them are available nationwide.  There are requirements to qualify for these yields.

To earn the top interest rate, consumers generally must meet monthly requirements such as one direct deposit or automated payment and 10 debit-card transactions, according to the study. The required debit-card purchases are the “biggest hurdle,” for consumers, McBride said. Savers who don’t meet the requirements in a given month earn an average of 0.11 percent, he said.

Banks also generally limit the balances in a checking account that earn the highest yield. The most common cap is $25,000, while others set it at $10,000 or less.

You won’t find big-name banks on the list. It’s mostly community banks and small local or regional banks. One reason for the rates is the requirement of a minimum number of debit card transactions. The federal government recently limited the fee a card issuer such as a bank can charge for the debit card swipe fee. Small banks with less than $10 billion in assets are exempt from the ceiling. Banks that are subject to the ceiling probably will lower their yields on high-yield checking or increase the required number of debit card uses each month.

Here’s a word of warning from Smart Money:

Because of all the many hoops, Richard Barrington, personal finance expert at consumer information site MoneyRates.com, doesn’t advise people to change their shopping or banking habits to fit the terms and conditions of high-yielding checking accounts. “When you start manipulating your financial habits just to qualify for that kind of deal and start spending more money than you intend, that’s when you can run into trouble,” he says. “It’s not a coincidence that many of the restrictions involve a certain amount of debit card transactions. Banks still make a good amount of money from overdraft fees.”

Money market funds are in the news again. Since their development in the 1970s, money market funds were considered ultra-safe places to store cash. Most investors considered them to be like cash that pays interest. Their net asset values always were $1.00. That changed in 2008 when the Reserve money market funds revealed they owned a large amount of Lehman Brothers debt. Lehman Brothers filed for bankruptcy liquidation, and the debt was worthless or close to it. This triggered a panic in money market funds across the country. Things calmed down when Congress said the federal government would guarantee most money market funds and the economy stabilized.

Now, the fears are back. Money market funds struggled the last few years. The Federal Reserve kept short-term interest rates low, so low that the yields on the debt money market funds purchased didn’t cover their expenses or left investors with little or no income after expenses. A number of money market funds closed their doors or closed to new investors.

To boost yields, many money market funds purchased debt of European banks. There’s apparently no one dumber than a European banker. They loaded up on the various U.S. mortgage securities during the bubble (see The Big Short by Michael Lewis). The last few years they loaded up on securities of the banks of the European creditor countries. These banks in turn made loans to the debtor European countries (Greece, Italy, Ireland, Spain, and Portugal). If one of more of these countries default on their loans, the banks will suffer. If the governments don’t bail out the banks, the money market funds will suffer.

U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated. European lenders held more than $2 trillion at year-end in loans to Greece, Portugal, Ireland, Spain and Italy, the most indebted European countries, the Bank of International Settlements estimated.

“It’s not about whether Greece defaults, it’s what happens after that, and there’s uncertainty behind that,” Alex Roever, head of short-term fixed-income strategy at JPMorgan Chase & Co. (JPM) in New York, said in a telephone interview.

To protect yourself and your cash, put short-term cash in insured certificates of deposit or money market funds that invest only in U.S. Treasury securities. Later, I’ll have a post with another option to earn higher yields and still keep your money safe.

Earlier today I published a post in which I said economic analysts are divided into structuralists and cyclicalists. Here’s an opinion piece from The Wall Street Journal, written by Nobel Economics Laureate Michael Spence, that makes the point in full. Spence says that unemployment remains high because many of the jobs that were lost aren’t coming back. The economy has changed. We don’t need as many construction and finance jobs as we once did. That’s why the old tried-and-true fiscal and monetary stimulus policies didn’t work this time. We need to restructure parts of the economy, and that means changing some government policies. Here’s a good quote, but you should read the whole piece:

A stimulus package that temporarily restores elements of precrisis demand is unlikely to generate the escape velocity needed to get out of the jobs hole. Nontradable job growth can’t mask the declines in the tradable sector any more. The structural problem demands a structural answer.

Here’s a headline from The Wall Street Journal online over the weekend: : “Costly Rush Away from Risk by Wall Street.” Here’s the teaser for the article:

A tumble in mortgage-bond prices set off a race by Wall Street to exit money-losing trades in recent months, depriving banks of a recent source of profit and leaving some firms potentially nursing losses.

That sounds like 2007 or 2008 doesn’t it. The last few years have been characterized by a disagreement between what I call the cyclicalists and the structuralists. The cyclicalists believe the financial crisis was a deeper than usual recession, but they don’t give any more ground than that. They believe all that’s needed for the economy to recover and return to its pre-2007 performance is low interest rates and easy money. That will induce more borrowing and another credit-led boom.

The structuralists, of which I am one, believe the economy became fundamentally different over the years. American households took on too much debt and became overleveraged. They now need to delever, which will take years. Government to some extent can prop up the economy by replacing the missing household debt with its own, but as we’ve seen there are limits to that. This WSJ article is a sign of that. As the Fed ends the quantitative easing program that propped up asset prices and the economy, the weaknesses are revealed. The recent spurt in many asset prices was as artificial as the last phase of the boom.That’s why the headline, and the rest of the article, read like something from 2007 or 2008.

By the way, the decline in mortgage securities prices of which the WSJ writes hasn’t affected our investments. DoubleLine Total Return Bond and TCW Strategic Income are doing well.

Bill Gross of PIMCO has been getting more cranky each month for a while. He’s basically renouncing the source of his wealth and success: an economy based on the financial sector, financial assets, and a lot of debt and credit. The bond king says we need to move in a new direction. In his latest monthly essay he covers a lot of ground. Foremost, he believes American families shouldn’t automatically send their children to college believing it will result in better incomes and opportunities for them. Related to that, the government shouldn’t encourage or subsidize four-year colleges as much. Instead, it should focus on trade schools that train people for “middle tech” instead of high tech or low tech jobs.

He’s also concerned about the clamor to cut the deficit. Reducing the deficit or national debt won’t create the jobs we need. Instead, government should spend wisely instead of the wasteful way it has. Invest in infrastructure that’s needed and likely to generate future economic growth:

Additionally and immediately, however, government must take a leading role in job creation. Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed. The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper. That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities. Our labor force is too expensive and poorly educated for today’s marketplace.

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is. Government must step up to the plate, as it should have in early 2009. An infrastructure bank to fund badly needed reconstruction projects is a commonly accepted idea, despite the limitations of the original “shovel-ready” stimulus program in 2009. Disparate experts such as GE’s Jeff Immelt, Fareed Zakaria, Jeffrey Sachs and Paul Krugman believe an infrastructure bank to be an excellent use of deficit funds: a true investment in our future. While the current administration admits that the $25 billion in Recovery Act spending on infrastructure only created 150,000 jobs, it also stabilized and improved this nation’s productivity for years to come. Clean/green energy investments also come to mind, most of which require government funding and a government thrust in order to create millions of jobs. China knows this and is off and running. The U.S. needs to learn from their state-oriented model. In times of extremis, pushing on the private sector string is ineffective, especially within the context of a global marketplace that offers alternative investment locations. Government must temporarily assume a bigger, not a smaller, role in this economy, if only because other countries are dominating job creation with kick-start policies that eventually dominate global markets.

What does this have to do with investing? Not much. Gross is concerned about the country’s future. Some months he directs investors to invest outside the U.S. to protect their wealth. Other months he provides advice to policymakers and voters to improve the country.

There’s a concept politely labeled “Get Lost Money.” It has a couple of less polite names. The concept is that a person should save money and avoid debt so that he’ll have options. When he doesn’t like a job, a house, or a geographic location, he has the resources to make a change. He can leave the job without waiting to line up another one (telling his employer to “get lost” or something harsher). But someone who doesn’t build a safety fund or nest egg and those who carry a lot of debt aren’t in that position. They’re locked in and dependent on their current situation.

Your level of income doesn’t determine your ability to tell someone or a job to “get lost.” The ratio of your savings to your fixed expenses is the key. Pile on a lot of debt and other fixed expenses, and you have few options. Avoid debt and you’re a free man.

It turns out the wealthy are the most likely Americans to be wage slaves. They build up a lot of fixed expenses, mostly debt payments. They have high incomes. But the incomes are spoken for before they’re earned, and these people are dependent on stable incomes. They also have minimum net worths despite their incomes.

According to data from Moody’s Analytics, the top earning 5% of Americans now account for 36% of consumer outlays. More incredible, this group (with an average income of $342,000 in 2008) have the lowest savings rate in the country: 1.4% compared with more than 8% for the rest of the population.

That means that people earning more than $300,000 a year save less than one fifth as much as the bottom 40% of earners.

I’ve known many modest income people who when they hit their late 50s or so accumulated nice nest eggs and had a lot of security and options for the rest of their lives. I also know a number of high income people who essentially live paycheck to paycheck and wonder when, if ever, they’ll be able to retire.

The once sleepy reverse mortgage business suddenly is hopping with news. Yesterday I reported that Wells Fargo was withdrawing from the reverse mortgage market. Bank of America also is withdrawing from reverse mortgages. Both banks say the uncertainty about home prices makes the products too risky. Also, with home prices in decline fewer seniors have home equity, so demand for the loans is down.

But insurer MetLife, through its MetLife Bank is ramping up its reverse mortgage business. It’s been steadily climbing up the list of top reverse mortgage issuers and now is #2. Bloomberg reports that reverse mortgages now are featured on the MetLIfe Bank web site.

The reverse-mortgage market is supported by the Government National Mortgage Association, a government-owned insurer of mortgage-backed securities commonly known as Ginnie Mae. The agency guarantees the loans that are issued by lenders like MetLife and subsequently sold to investors. MetLife charges investors to then monitor the home collateral and ensure terms of the contracts are met.

“None of the lenders are doing these to keep them on balance sheet,” said John Lunde, founder of Reverse Market Insight, an Aliso Viejo, California-based data and consulting firm focused on the reverse mortgage market.

The Chinese economy has been driving the world economy since early 2009. Likewise, the Chinese stock market was leading global stocks higher. It hasn’t received much attention, but Chinese stock markets have been in the doldrums for a while. They’ve been leading global stocks down in the latest correction. Bespoke Investment Group says the Chinese index “looks pretty awful right now” and has “broken down.” With China actively trying to slow its economy to bring down inflation, I’m not getting that this is merely a correction.

A reverse mortgage can provide an older person with substantial cash while allowing him or her to remain in his home. Most home mortgages are insured by the federal government, making lenders willing to make what could be a risky bet on how long a person will live. The number of reverse mortgages written over the last few years has been growing rapidly. We’ve covered in Retirement Watch who should consider taking out a reverse mortgage along with the advantages, disadvantages, and pitfalls to look out for.

Last week a major home lender, Wells Fargo, announced it would bow out of the reverse mortgage market. The main problem for the bank is that home prices continue to decline, and the bank has no idea when that will stop. It can’t see making long-term loans such as reverse mortgages when it can’t make a reliable estimate of the future value of the home that will be used to repay the loan. Wells Fargo will continue to honor and service existing home mortgages.

John Hussman thinks people are paying too much attention to Greece’s debt crisis and not enough attention to what’s happening in the U.S. He thinks a Greek default is inevitable but not imminent. Greece is likely to default in the late stages of the next bear market instead of in the near term. Hussman’s greater concerns are high valuations in U.S. stocks couples with a weak market climate and a possible slide into a recession.

The market is clearly oversold on a short-term basis (though only slightly on an intermediate-term basis). This has reached the point where some good news about Greece could prompt a relief rally, but the quality of market action in any advance will be important. We could see a bit of latitude to accept modest exposure on the basis of speculative merit, but that would require a shift toward more favorable internals, and it’s likely that any material advance would quickly reestablish an overvalued, overbought, overbullish, rising-yields syndrome. An improvement in market internals from lower levels would provide greater latitude for sustained exposure.

Despite the short-term oversold condition of the market, I should be clear that we are presently observing a combination of evidence that is typical of early bear markets – having some potential to be reversed, but with a generally dangerous record overall. This evidence includes the present combination of unfavorable valuations and unfavorable market action, developing concern from the most accurate version of our recession warning composite (which would be completed with a monthly S&P 500 close below about 1250 and another weak ISM report), a recent advance that has already passed the historical norms for extent and duration of cyclical bulls within secular bears (see Hanging Around, Hoping to Get Lucky ), and the neutral intermediate-term but hostile longer-term evidence we observed at the early May peak (see Extreme Conditions and Typical Outcomes ). All of this presently holds us to a generally defensive investment stance.