Janet Yellen Nomination to Keep Low Rate Policy in Place

Janet Yellen Nomination to Keep Low Rate Policy in Place

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Janet Yellen's nomination to be the Chairwoman of the Federal Reserve means the Fed's low rate policy will remain in place into the future.

The news of the government shutdown and the approaching fiscal cliff have grabbed the headlines from an even more important event this week for savers and borrowers – the nomination of Janet Yellen as the next Chairperson of the Federal Reserve. While current Fed Chairman Ben Bernanke’s specialty revolved around the Great Depression and how to avoid economic calamities, Ms. Yellen’s specialty and research has revolved around the impact of monetary policy on labor markets. A review of her policy speeches shows that she is willing to allow inflation to run up a bit in order to ease unemployment, and thus tends to support a looser monetary policy than some other economists and members of the Federal Reserve. She is quoted as saying: “To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.”

The NY Times has reported that Ms. Yellen helped organize the recent decision to continue the current level of quantitative easing and to include in the Fed’s December announcement that it would tolerate projected inflation at 2.5% in order to reduce the unemployment rate.

In general, Ms. Yellen has voted with Chairman Bernanke most of the time on issues revolving around quantitative easing and she broadly agrees with him on monetary policy. She has also been one of the chief proponents and architects of the Fed’s asset purchases.

Critics say that she is too easy on money and that her views promote asset bubbles, like the Internet, housing, and now potentially foreign markets.  

The bottom line is that savers and borrowers shouldn’t expect to see any major changes in policy when she joins the Fed. She is expected to work to continue to make the Fed more consistent and continue to refine the Fed policymaking process, but her views dovetail closely with Bernanke’s.  If there is to be any change, it might be that she lets quantitative easing run a bit longer than Chairman Bernanke, leading to lower rates for a longer period of time.

The NY Times had a good article summarizing her background and views called Yellen’s Path From Liberal Theorist to Fed Voice for Jobs.

 

Image: Stuart Miles at FreeDigitalPhotos.net

If the US Defaults in October, Is Cash the Only Safe Place to Hide?

If the US Defaults in October, Is Cash the Only Safe Place to Hide?

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Cash is always the safest place to put your money in a crisis. Against the prospect of a dramatic slowdown in the economy stemming from a sovereign default, cash again seems like a safe haven. A US default will lead to real stock and bond market declines and almost certainly a drop of commodity and real estate values.

Even in periods of historically low rates on cash instruments, savings and money market accounts often outperform all other instruments, especially if all other instruments suffer a synchronized decline following major economic disruptions. 

With online instruments offering 0.85% to 0.90% these days, cash is not sexy.   In fact, those who stayed heavily in cash over the last four years have missed out on a historic move in the stock market.  They have also missed out on bond and asset price appreciation.  Perhaps most importantly, they have lost purchasing power as savings and money market accounts have not kept up with inflation (especially after accounting for tax consequences).

Today, real estate, bonds and the stock market have all seen dramatic and real runs, not all entirely consistent with economic realities.  Regardless, the impasse in Washington and the prospect of a sovereign default by the US if the debt ceiling is not raised, argues especially persuasively now in favor of stepping aside for a bit. 

Of course investors with a time horizon beyond a couple of weeks would be imprudent to dump all assets and move completely into cash. With the Fed having chosen not to taper and the dovish history of the likely incoming Chair, Janet Yellin, who is committed to keeping rates low until unemployment falls below 6.5%, cash may not be an ideal place even at this time to assign new money. 

Many private and institutional investors, rather, have been focusing on high quality corporate bonds ever since the Fed’s announcement in September that it would not begin tapering at this time.  As I survey the landscape, one bond-like instrument that seems particularly interesting at this point is Public Storage’s preferred stock. 

I first wrote about Public storage’s preferred stock on BestCashCow in 2012.   All of the classes of Public Storage preferred stock that were available then were called at par value ($25) late in 2012 and early in 2013; the company subsequently issued new shares in the form of Class V and Class W at lower yields - approximately 5.25 and 5.45%.   Each class pays dividends quarterly and both traded above par earlier this year, soon after they were issued.  As of the date of this publication, however, both shares are significantly discounted with the V shares trading around $21 a share and the W shares around $20 a share.  In other words, both shares are trading with effective yields, plus or minus, of 6.45%.

While these shares have fallen quite sharply over the summer as long term bond yields went up, Public Storage (PSA) appears a very safe company in the face of a potential new Congress-initiated recession.  The Company is efficient and effective and its business model is pretty much recession proof.  Its debt and preferred stock, as a percentage of gross assets, is at historically low levels (below 30%) and it faces virtually no debt refinancing obligations in 2014.

As I noted in my 2012 article, preferred stock is an animal in and of itself and is ordinarily not a good place for individuals to park cash (largely because they are instruments of indefinite duration and because individuals cannot take advantage of many US tax incentives on ownership of preferreds made available to corporate purchasers).

Public Storage’s preferred stock is currently rated Baa1 by Moody’s, having been upgraded in late 2012.  While there is real risk of a decline in principal (a continued decline in principal for holders of the initial issuance) if and when interest rates rise again, a 6.45% yield on a Baa1 instrument is not otherwise attainable at the moment. Therefore, Public Storage’s preferred stock just might be a place for those investors seeking protection and return to assign some of their cash while waiting for Washington to sort itself out.


Massachusetts' Depositors Insurance Fund (DIF) Is Important for High Net Worth Depositors to Consider

Massachusetts' Depositors Insurance Fund (DIF) Is Important for High Net Worth Depositors to Consider

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Three Massachusetts banks now offer competitive online savings accounts. Should one rely on the State's Depositors Insurance Fund and deposit amounts over FDIC limits in these banks?

The Depositors Insurance Fund (DIF) was created in 1934 and, while independently operated, includes all Massachusetts licensed banks as members.  According to DIF’s website, the Fund extends coverage above and beyond FDIC limits to depositors at member banks regardless of their states of residency.

DIF has over $350 million in assets. During the recession of the early 1990s, the worst financial period in the history of the Massachusetts savings bank industry, DIF paid out more than $50 million to protect over 6,500 depositors in 19 failed member banks.   During the 2008 to 2011 bank crises, the DIF was not affected by the spate of bank failures as none of its members were among those banks that either failed or were seized by the FDIC.  Funds in the Massachusetts DIF are highly regulated today by the Massachusetts Division of Banks, and the fund again has significant reserves on hand to cover failures of member banks.

There are now three highly competitive online banks in Massachusetts, all members of the DIF.  Assuming the DIF website is correct that all depositors are covered regardless of their state of residency, a depositor who might otherwise be inclined to keep online savings accounts below the FDIC’s individual $250,000 insurance limit could now be covered in depositing well over that amount in a DIF member bank.

EBSBDirect, a subsidiary of East Boston Savings Bank, currently offers online depositors residing in New York and New England 1.17% on deposits up to $1 million in an online savings bank.  Salem Five Direct, a subsidiary of Salem Five Bank, offers new depositors 0.90% on online deposits up to $500,000.  BankFive Connect, a division of Bank Five, recently introduced an online savings account offering 0.90%, but which is only available to residents of certain states (and, quite amazingly, it is not available to residents of Massachusetts and Rhode Island).

These online banks have all had some customer service problems in the past, and none of them provides online banking interfaces or customer services comparable to Personal Savings by American Express or GE Capital.  Salem Five Direct has bank fees that are excessive for online savings accounts and make it a less than desirable place to put cash that may be needed quickly and/or often.  BankFive Connect has a website with nice pictures but relatively sophomoric customer service.

Depositors for whom FDIC limits are not an issue will find that it makes more sense to stick with well-recognized online banks and their superior customer services.   Even many depositors with $1 million or so to deposit will find that they can achieve their goals and stay within FDIC limits by distributing their money among several banks with outstanding customer service.  However, depositors seeking to hold more than that amount in online savings accounts can find protections from Massachusetts’ DIF insurance and deposit amounts above FDIC limits in one or more of these Massachusetts-based online savings accounts.