Easy Street Investing

Are we in for four more years (of low interest rates)?

Nilus Mattive

There’s no doubt that the outcome of our upcoming presidential election could have far-reaching effects on everything from the tax rates we pay to what types of investments we should own in the months and years ahead.

In fact, as my colleague Don Lucek points out, certain types of stocks look best positioned to start posting big gains as soon as November 7.

Of course, there’s perhaps no policy that’s more important to all of us than the Federal Reserve’s handling of interest rates.

As was widely expected, Ben Bernanke and his buddies announced yet another money-printing scheme last month. In this third round of so-called quantitative easing — known as either “QE3″ or “QE-infinity” depending on who you talk to — the Fed has begun buying as much as $40 billion A MONTH in agency mortgage-backed securities.

The goal here, quite simply, is keeping interest rates at rock-bottom levels — particularly at the longer end of the spectrum.

Take mortgage rates. As the Fed has begun buying mortgage-backed bonds, the cost of home loans has continued to plummet.

Although I knew it could happen, I’m still amazed that 30-year fixed mortgage rates now stand almost another full percentage point below last year’s levels.

I refinanced last year at 4%, which was a tremendous bargain at the time. Now I’m calling up my mortgage guy and considering doing it again at just a bit over 3%. That’s a 30-year fixed loan … no points … very little fees … and interest savings that will more than pay for the cost of refinancing in just a year’s time.

However, only select groups of people can actually take advantage of these rates right now. More importantly, there are huge side effects. For example …

These Rock-Bottom Rates Are Absolutely Decimating
Our Nation’s Conservative Savers and Retirees!

Before Ben Bernanke and his Washington cronies pushed interest rates down to near zero, it was quite easy to earn an honest return from your money.

You could simply put it in a CD or money market and earn 5% or 6% a year safely and easily — guaranteeing that your money would at least keep pace with inflation.

Not so today, and that is 100% intentional.

If you keep your money in a CD earning nothing Washington is happy because their banker buddies have plenty of cheap money to float them further down the river. And all the while your local vampire bank is lending your hard-earned retirement money back out to other people at much-higher interest rates. (Assuming they’re lending it back out at all, of course.)

Meanwhile, if you opt for U.S. Treasury bonds you’ll get a bit more return. But they’re virtually guaranteed to drop in value over the longer term.

Washington loves this scenario even more than having your money going to a bank because it needs to get more money into its own coffers to cover its massive — and ever-growing — deficits.

It’s the same thing at the state and city levels.

Heck, I probably don’t need to get too deep into it. You are well aware of how bad things are in America’s states and towns. Their budgets are just as screwed up as Washington’s. In fact, some of our nation’s local governments are in WORSE shape.

xxxxx
Click the chart for a larger view.

All told, state governments across the country face budget deficits of about $89 billion this fiscal year —the second largest in history — and have spent more than half a trillion dollars more than they bring in.

Plus, even though the real estate market has supposedly bottomed … municipalities are still feeling the pressure as millions of homeowners fight their property assessments and end up paying less money into government coffers.

Yet as with the other choices, plenty of retirees are just handing over their money to these cash-strapped entities … all in the name of getting a couple percent a year.

Plus, People WITHOUT Large Savings Accounts
Are Also Being Hurt by Low Interest Rates.

Even those folks who DON’T have significant money in their bank accounts are suffering from other aspects of rock-bottom interest rate policies, including a weaker greenback and rising prices in critical areas like energy, healthcare, and food.

In fact, all U.S. taxpayers are ultimately funding this rather large economic experiment in one way or another. And make no mistake — we ARE in uncharted waters when it comes to our country’s current monetary expansion.

According to research recently performed by my colleagues at Weiss, and based on the Fed’s own data, the Federal Reserve is now expanding its balance sheet at a pace 57 TIMES faster than it has at any point since 1945!

So How Long Can This Big Experiment Continue?

The Fed’s QE3 is open-ended but the current estimate is that it will at least continue through the middle of 2015. That’s three more years right there!

And what do you think the odds of a further extension might be? Will we still be talking about near-zero interest rates when the NEXT round of presidential ads is on the television?

If Bernanke has his way, it sure looks like it. In fact, Goldman Sachs economists issued a research report saying they believe the total value of QE3 could easily hit $2 trillion … and that the Fed won’t raise its benchmark federal funds rate until 2016!

Of course, we’ve already been suffering with near-zero rates since 2008 and the positive effects on the economy are questionable at best. If anything, one can only wonder how bad things might actually be without zero interest rates.

Many of us also wonder what will happen when it’s time to unwind all of these policies …

How will the Fed get all of these assets back off its balance sheet? And will it be able to control inflation if it suddenly kicks into high gear?

It’s hard to say. But the longer these policies go on, the bigger the stakes … and that’s something that needs to be considered by whoever ends up in the White House on November 7.

Best wishes,

Nilus

LEAVE A COMMENT

We want you to know that we take your questions and comments very seriously. In fact, they directly influence how we operate our Website. While we can't give specific tailored investment advice to you, we will do our best to address your inquiry through a personal response, in our regular issues or dedicated Q&A issues.

  • http://www.facebook.com/profile.php?id=100003406988023 Rezpector

    That’s the thinking of a crtaieve mind

  • jrj90620

    The real fun will begin when the Dollar starts going into free-fall,forcing the Fed to raise rates to bail it out.What’s going to happen to all those low interest rate loans the banks are making today?Will these banks end up in the same mess that happened to the S&L’s(most went bankrupt) when Volker raised rates to double digits to save the Dollar,during the 1980′s?When a country runs endless deficits and chooses a dishonest monetary system,bad results are assured,and deserved.

  • Hill

    Savers can use TIPS if they want to save ank keep pace with inflation can’t they?

    • Nilus

      I continue to prefer I Bonds to TIPS right now but, yes, both categories can provide some protection against inflation — or at least the “official” rate of inflation.