Savings and CD rates continued to firm into the end of 2018.  However, as we predicted back in November, Fed Chairman Jay Powell has now fully equivocated as a result of presidential harassment and the Federal Reserve has now held the Fed Funds rate at 2.25% to 2.50%.   It is possible that rates could be here until later in 2018.  Here are 3 savings accounts that we find attractive at this point:

1.   MySavingsDirect – 2.40% Savings Rate, No Minimum Balance

MySavingsDirect is a division of Emigrant Bank, a large New York-based bank.   Customer reviews are mixed and Emigrant has a history of dropping rates in one division (holding customers who don’t regularly check their rates) while raising rates in other divisions,.   However, MySavingsDirect has been competing for depositors by raising rates for some time and, it is, at least for the moment, the highest yielding account without a minimum balance requirement.   In addition to the need to stay on top of the rate to make sure it isn’t lowered, those considering MySavingsDirect should know that it does have direct ACH connections to all other banks (which is something that is pretty standard among most online banks).

2.    CIBC Bank – 2.39% Savings Rate, No Minimum Balance

A couple of years ago, The Private Bank which operated out of Chicago offered competitive online savings rates.   The bank was purchased by the CIBC, one of Canada’s largest banks, which in late 2018 re-launched the platform under the CIBC Agility brand in order to compete for deposit accounts in the U.S.   CIBC now appears to be a very aggressive market participant.    It has been among the first to raise their rates when the Federal Reserve raised the Fed Funds rate.   To boot, the bank’s online savings account has no minimum balance.   

3.   CIT Bank Savings Builder – 2.45%, Requires $25,000 Balance or $100 plus an additional deposit of $100 a month

CIT Bank’s reviews are ordinarily favorable and their rate is very attractive.   However, unlike the above two savings accounts, this rate does have a minimum balance requirement.   There are two ways to qualify for the savings builder account – either to maintain a $25,000 balance or to open the account with $100 and deposit at least $100 during each monthly measurement period (between the 4^th day of each month until the 4^th day of the following month).   We think CIT is likely to remain competitive and named it one of our best bets for 2019.

See and compare all of the best online savings rates here. 

While we have been hesitant to recommend CDs with rates rising, the Federal Reserve’s recent decision to slow the pace of rate increases may provide reason to take a look at one-year CDs, particularly those with low early withdrawal fees.   Here are two that are competitive, and will penalize you with only 3 months of interest should you need to break the CD early.  

4.   Live Oak Bank – 2.85% 1-Year CD, $2,500 Minimum

Live Oak Bank is a small North Carolina bank that entered the online banking arena last year.     It has not been a consistent competitive player in the savings space and it can and does frequently adjust CD rates.   At the time of this publication, their 1-year CD rate stands at 2.85%.    Live Oak does not enable an account holder to have over $250,000 in total in their CDs, and you should not be exceeding FDIC limits with a small North Carolina bank anyway.

5.   Sallie Mae Bank - 2.85% 1-Year CD, $2,500 Minimum

Sallie Mae Bank has an old interface and you will see a spinning wheel when you try to open a Certificate of Deposit there.   But, its rate is 2.85% on a 1-year CD and it is likely that they will still be among the most competitive rates when it comes time to renew.

Check out the best 1-year CD rates here and see long-term CD rates here and special rate CDs here.

Have a great month.

It has been many years since I co-founded BestCashCow, and I have heard just about every excuse possible for keeping your cash in low interest earning savings and money market accounts, checking accounts and CDs.

However, there is a new refrain that I am hearing and it is actually really irking me.  It goes something like this.

“Well, I have been meaning to move my cash out of Wells Fargo but I haven’t gotten around to it and I am sure that if rates are going up, they will have to become competitive soon so I am just going to leave it there.”

The only part of this quote that is even remotely correct is that rates are, in fact, going up.   The reality is that the large money center banks are currently flush with cash from other funding operations, and from others taking the same wait-and-see approach.   Today, the big banks are able to raise more money than ever before through capital markets to fund their lending operations, and they now have more money in deposits than they have ever had before.

These banks are counting on being able to successfully sell the pitch that they are delivering a better service and therefore customers should be willing to continue to accept zero interest rates for the service.   My personal view is that this pitch may continue to be compelling for depositors of small amounts.   For those holding $15,000 in a deposit account at Chase you gain access to their ATM network, their branch network, notaries and maybe safe deposit boxes, and even then you really need to require these services to justify forgoing over $400 in interest annually.

But, anyone holding over the bare minimum for the services that they need from a money center bank is not adopting best practices in relation to their finances.

There are banks and credit unions where you live and online banks that compete for your savings.   In fact, there are local banks, credit unions, online banks that are competing for your checking by offering far better rates and often times the same services.   Seek them out now.

Jack Bogle pioneered the investing world and the mutual fund industry.   He taught the world that they should not be paying fees for performance, and that seeking to be average will outperform over the medium-term and the long-term.    He was correct that the extraordinary performance of a single manager is seldom, if ever, sustainable and that their fees will exact major damage for the investor.

I have been amazed that the best business schools in the country – Columbia, Harvard and Stanford – are still full of aspiring analysts and money managers in the post-Vanguard era. all still seeking to open their own funds.   More amazing is that many of these folks are still successful in raising capital (many aren’t).

Ever since I co-founded BestCashCow, I have frequently been asked if it is my view that people should avoid the stock market.   That has never been my view.   Over the long-term, investing in a broad and diversified stock market portfolio, and only just matching the stock market is the single best way to build wealth.   My view is that you should never be 100% in the stock market and that you will never know when you will require liquidity.  I’ve now lived long enough to know that many who were overinvested and forced to sell in October 1987, early 2001 or early 2009 were, without exaggeration,  slaughtered. 

So, while you should never be 100% in the market, you should be in the market in some form.   And, for those who don’t know how to build their own portfolio through an online broker, an extremely low fee fund like the Vanguard S&P 500 Index is a much better way than to pay fees upon fees upon fees to invest with someone who has put together a couple of good years at the track.  And, running parallel with forays into the market, of course, must be the wisdom to keep resources out of the market and in savings and CDs.  It’s that dual strategy that will always be a winning strategy.

Occasionally, financial planners reach out to me and want to connect on LinkedIn and social media.  While I do not hold financial planners in very high esteem since, they are always selling their latest product.  I occasionally connect in order to further the reach of BestCashCow.

I do not often engage in debate with these folks, but sometimes I see information shared that is so dangerous to investors and their retirement planning that I need to say something.

That happened this morning with this Wall Street Journal piece: https://blogs.wsj.com/experts/2019/01/06/how-to-play-the-bond-market-during-a-bear-market/

I have written before about the dangers of owning bonds of any nature in an environment where interest rates are rising and spreads are increasing.

As dangerous as individual bonds may be, they are in principle much less dangerous than owning a bond fund, even a high quality bond fund, since you can always just hold a bond until maturity without having your proceeds drained by a manager in a down environment.   At maturity, you get out at par, whereas you may never get out of a bond fund at par.

The 10-year US Treasury went to 3.20% last year.   As interest rates rose, bond prices fell.   Market turmoil over the last 2 months has lead people to seek safe haven in bonds and that has brought US Treasury rates back to 2.60%.   But, this is a blip.   It is a fleeting moment where you should be selling bonds and bond funds.   It isn’t a time to buy.   The Federal Reserve is still normalizing interest rates and in that environment the 10-year is still going up.

These two graphs from the St. Louis Fed are the best warning I can give.   The first, that dates back to 1960, shows how abnormally compressed the 10-year Treasury is by any long-term measure.   The second, dating back only 10 years, shows how quickly 10-year US Treasury rates can reverse and rise (even in an environment where interest rates are low).  

The “buy bond funds” crowd came out of the woodwork in dramatic fashion in mid-2010 as the 10-year fell from 4.00% to 2.50%.   Those who followed this advice saw their funds collapse when interest rates reversed and were in a world of pain in January 2011.   While those folks found some opportunities to get out later, opportunities which buyers today may not get.

Stick with savings accounts and short-term CDs for now.

I cannot do it anymore.   I just cannot watch CNBC or Bloomberg.   It isn’t because the market is falling (it is).   And, it isn’t because I cannot bear to hear the usual batch of cheerleaders (so-called “analysts”) extolling the virtues of being long in an uncertain time.

Unlike 99% of the analysts, Joe Lavorgna is about as reasoned of an analyst as CNBC ever has as a guest.   Yet, he too denies inflation and says that the Fed needs to relent and “let the economy run hot.”

The problem with Lavorgna’s reasoning is clear: the Fed has a dual mandate of full employment and price stability.   Price stability is achieved by fighting inflation and ensuring that the real value of the US currency maintains its current level of purchasing power.  If $100 today becomes $102 in a year, but has the purchasing power of $90 today, the economy falters.  People need to earn enough in  their savings accounts and other risk-free investments in order to ensure that they don’t lose the value of their money because that will cause the wealth of the nation (and consumer confidence) to collapse.

Were Chairman Jay Powell to allow the Federal Reserve’s mandate to become the growth in the stock market (as Wall Street would like) and cheap borrowing costs for real estate developers (as the President would like), the Federal Reserve would be risking a diminution in our nation’s wealth in order to get a continued rally in the stock market.  

But, Wall Street’s cheerleaders are pushing for this short-term gain over long-term economic security  when they try to explain that there is no inflation.  

Let’s clear this up:

First, there is inflation.   Annual rates of inflation are calculated based on the Consumer Price Index, issued monthly by the Labor Department’s Bureau of Labor Statistics.   The CPI number issued on December 12, 2018 indicates a move from 246.669 to 252.038 from November 2017 to November 2018 for an inflation rate of 2.20%.    This rate is still historically low, although much higher than the measure for the last several years.

The CPI indicator is controversial for many reasons, but one thing that economists universally agree upon is that it is backward looking.  The Fed, therefore, looks at a variety of other factors many of which are going to try to measure incipient inflation.

Second, there are all sorts of reasons to believe we could have serious inflation in 2019 that will not show up until it is here.

I see at least four significant inflationary pressures in 2019 that weren’t present in 2018.  

• Continuation or escalation of the trade war with China is inflationary as we have long relied on China for all sorts of low cost items and inputs.   Tariffs placed on those items will cause the cost of goods to increase or purchasers to find alternative - and more expensive – replacements.
• Brexit and its March 29, 2019 deadline present a range of possible outcomes.   A hard Brexit or anything that might resemble it will be tragic for the British economy, but the disruption that it will cause in global markets will be inflationary.
• Commodity prices collapsed in the second half of 2018.   If oil does anything other than continues to fall in a straight line, transportation costs will increase.   If other commodities bounce, input costs will rise.
• Minimum wage has just increased on January 1, 2019 in 20 states (including California and Florida) and a bunch of other cities (including DC).   This affects the wages of 17 million people.   In New York City, the cost of employing someone is now $15 an hour.   If you don’t think that higher wages get passed on in the form of higher costs, come visit New York.

When analysts stop their market cheerleading and look at the same risks that the Federal Reserve and Jerome Powell are looking at, the inevitable conclusion is that the Fed needs to continue to hike rates in 2019.

Because my predictions for 2018 have proven to be largely correct I have been emboldened to release my predictions for the coming year.

I correctly predicted online savings and money market rates going above 2% before October 2018, online one-year CD rates going above 2.50%, and 5-year rates going to 3.50%.  I am now predicting that online savings rates go above 3% in 2019, and that 1-year rates will go above 3.50% and 5-year rates above 4.50% in 2019.  The Fed is guiding that way.  And, even if Trump tries to remove Jay Powell, rates will continue to move up and it is good for the country to normalize interest rates.  If you follow my prediction, you will basically continue to be in savings accounts and you will not lock into CDs longer than one-year.

I also predicted the stock market’s assent and its decline, as well as the decline in bitcoin.  Bitcoin is going below $1,000 and it is never coming back.  The stock market will go much further down over the coming months, but it will ultimately end 2019 a little higher than where it is right now.  Bond yields will climb and real estate will continue to fall.  Cash in the form of savings and CD rates will match the stock market’s performance in 2019, and outperform everything except perhaps oil, gold and some other precious resources (that are all starting the year at such low bases that they have nowhere to go but up). 

My 2018 prediction about the 25^th Amendment was premature and based on hopeful speculation.  It didn’t come to pass in 2018, but it will in 2019.  Pence will also become implicated in the Mueller probe, leading to his quick resignation or impeachment.  Pelosi’s elevation to the Presidency will be the impetus that causes the stock market to stop falling.

And, just like 2018, we’ll be happy and surprised at the end of the year that the country is still intact at all.

Happy New Year.