2018 Is A Lousy Year to Leave Your Money Where It Earns Nothing

Rate information contained on this page may have changed. Please find latest savings rates.

Happy New Year!  2018 is going to be a great year.  Will it be another barnburner on the stock market like 2017?  Maybe, but you sure cannot bet everything on it.

What you can be sure of is that savings rates have moved up.   There are many online banks that are beginning the year paying 1.40% on savings accounts.   There are now many 1-year CD rates at or above 1.70%.  (Longer-term CD rates have also recently moved up and are worth watching in 2018, but we would begin the year by exercising some caution here.)   Depending where you live, you may even find local rates at banks and credit unions that are much higher.

For many years, I have heard the constant refrain.   “Why bother?   I may be making 0.01 at Chase or Citibank or Wells Fargo or Morgan Stanley or Merrill Lynch, but it just isn’t worth my time.”  I often hear this from people who have millions sitting in cash.

If you have $2 million spread across 8 or 9 online savings accounts and short-term CDs (to stay below FDIC and NCUA limits), you can easily earn $30,000 pre-tax in 2018 on this money - and more as rates go up from here.  Even if you are lucky enough to be in a high tax bracket and to live in a blue state and be severely impacted by the Trumpian tax law, you are still likely to net $16,000 or $17,000 after tax on this money.

We think that there is a lot you can do with that $16,000 or $17,000 in “free” money in 2018.  You can put it towards a new car, take your family on a trip to Hawaii or save for your kids’ education.   You could also give it to any small charity that will also be severely impacted by the tax changes.

It will take you 30 minutes online to open the accounts and set up the transfers.  Just don’t let the bank make (or take) the money for free for another year.

Make a New Years' Resolution and fix this now.


Bitcoin and Blockchain: “That’s OK. I Didn’t Really Understand It At First Either”

Rate information contained on this page may have changed. Please find latest savings rates.

I am old enough to have lived through 1999 and 2000.  Actually, I am old enough to say that it is part of my adult experience.  I worked in the internet and telecom sector then.   We were building real things and the world was being transformed by the internet and the new opportunities it was creating.  Was pets.com’s stock worth what it at then?  Or AOL?  Or Akamai?  Or Cisco?  We learned later in 2000 and 2001 that these companies didn’t have the value that the markets ascribed.  But, in many cases there was cash flow and these companies were transformational; they were changing our world.

In 2007 and 2008, the market again became dramatically overheated, largely due to over-lending on the part of the financial institutions.  I personally was fortunate and managed to sidestep the financial damage that many suffered.  I respect those who miscalculated though.  There was cash flow and the prospect of moving our country from one of 62% home ownership to one of 75% home ownership seemed transformational.

Fast forward to today.  With Bitcoin at $17,000 and all sorts “coins” and stocks geared to blockchain spiking in value, there is very little that appears transformational.  There seems to be a whole lot of commotion and a whole lot of opportunity to move money around outside of governmental oversight (with perhaps Russian and North Korean involvement).

But, Bitcoin has brought back out all of the people whom I know and who created late stage businesses in 1999 and 2007, companies that had little economic merit but were designed to piggy-back off of what became a frenzy.  They have again reappeared on CNBC, and by connecting with me on LinkedIn.  This time they aren’t talking about cash flows and economic transformation.  They are talking about Etherium and blockchain and the only thing they are saying is: “That’s OK.  I didn’t really understand it at first either.”

I am not going to get into the credibility or motives of these people.  They may manage to drive Bitcoin and all of its ancillaries a lot higher.  But, I don’t buy it; I do not believe nor understand adequately the hype or the foundational elements underlying the Bitcoin phenomenon.  And, I am not alone.  Consider it safe to say that I am not going to be trying to make my fortune on Bitcoin.  


New Tax "Cut" Not Really A Christmas Gift for America

The details of Donald Trump’s and Congressional Republicans’ tax cut have only just come out.  And, the details tell all.

First, I would not go out and celebrate, unless you:

  1. are in the real estate business
  2. run a large corporation
  3. have millions (many) in the bank and plan to die in the next 8 years
  4. are a wealthy investment manager
  5. are in the liquor business
  6. are a tax accountant

And, even then, those above have only an eight-year window before the new cuts expire for individuals (but not for corporations).  Eight years will go fast, and it could be much faster if the Democrats come into power in 2022 and reverse the tax cuts immediately. 

But, most of all, it is important to understand that this is not a middle class tax “cut” for needy Americans.  In fact, it is just the opposite.  The wealthiest, from extremely wealthy to very wealthy, are clearly those who win here.  And, the rest get a bone here and there, but nothing lasting and nothing that will seed the promise of continued and expansive economic growth.

So, be careful.  Do not listen to those who tell you the good times are here again.  Husband your resources and buy only what you need.  Invest with great caution with every market at exceptionally inflated levels, saving the rest in the highest yielding savings accounts and CD accounts.

And, remember that the best lesson gleaned from all this talk about a tax cut for all Americans is that Congress is out for itself and certainly not acting in the public’s interests.  In fact, all conservative principles about debt and taxes have been thrown out of the window to pass this bill.  


Fed Funds Rate is Raised to 1.25%

Rate information contained on this page may have changed. Please find latest savings rates.

The Federal Reserve, acting today in Janet Yellen’s final meeting as the Chairman, voted to raise the Fed Funds rate by 25 basis points.  The Fed funds target rate is now 1.25% to 1.50%.  The Fed is continuing to guide towards three 25 basis point rate hikes in 2018 which would lead to a Fed Funds rate of 2.00% by December of 2018.  Although there were two dissenters, and although Jerome Powell and an entirely new team of five Federal Reserve governors will be assuming roles in January, most economists agree that there will be three hikes in 2018.

We are slowly but surely seeing a normalization of interest rates in an effort to curb liquidity as the economy has moved over the last eight years from a dramatic recession to fast expansion.  Easy money is no longer required, and it is clear that the Fed, even under Jerome Powell, will raise rates further and in a measured way over the next two years, baring a shock to the economic system.

The pace of rate hikes, nonetheless, will continue to be especially slow for retirees, those who are averse to investments in the stock market, and others who otherwise depend on a risk-free rate of return in order to maintain a certain standard of living.

Savings rates are higher now that they were at the beginning of the year, and may move still higher as we move through 2018.  While the spread between average online savings rates and average online one-year CD rates has widened over the course of 2017 from about 33 basis points to about 45 basis points (see the third graph in our rate analysis), one-year CDs are not particularly compelling if you believe rates will continue to rise.  Rates are rising on longer term CDs as well, but if you expect continued rate moves in 2018, moving to higher yielding online savings accounts seems to be the best bet here.

When the Federal Reserve raises the Fed funds rate, as it did today, you also often see an immediate move in the prime lending rate offered by most major banks.  We expect that most banks will immediately raise their prime lending rate by 25 basis points which will have an equally immediate flow-through to credit card rates and auto loan rates.   If you have been considering locking into a home equity loan or a new fixed rate mortgage, you may want to consider doing so before the Fed’s moves again in a few months.


Our Predictions for 2018

Rate information contained on this page may have changed. Please find latest savings rates.

It is that time of year – the end of one and the beginning of another.   Every pundit is adding their economic predictions, so we’ll add ours.

We’ll begin with one caveat.  We had not seen the S&P going to 2600 in 2017.   We had believed that a President acting only in his own interests would cause a recession.  We were wrong.

Where we were correct was in our estimation that interest rates would rise, giving some relief to those seeking or needing to grow some of their nest egg in a risk-free manner.   That will continue in 2018 with the Fed under Jay Powell moving to raise rates at least three times between January and December.

As a result, we will see online savings rates cross over 2% before October.   1-year CD rates will offer around 2.50%.  With the leading money center banks continuing to offer next to nothing, online banks and their offerings will become more interesting than they have been at any time since 2007.  Local banks and credit unions will compete importantly thanks to aggressive roll-back of Obama era regulation after a lengthy and extensive debate on the matter between Elizabeth Warren and Paul Ryan.

Strong US growth will continue, mostly attributed to give-aways to some of corporate America through tax and other legislation.  Therefore, the yield curve will normalize with the 10-Year US Treasury getting close to 4%.  While 2018 will be a bad year for bonds, we’ll see 5-year CD offerings at 3.50%, with the occasional local promotional rate even higher.  This will be an opportunity for those with cash to put money safely away for a few years.

The rise in interest rates will cause those who have put off remortgaging their homes  or taking out a home equity loan to regret not having locked in at the beginning of the year.   Housing prices – especially in New York, California, New Jersey, Connecticut and Illinois – will fall quite dramatically due to changes in state and local taxation deductions.   Those purchasing at prices more than 20% below 2017 prices will be happy to pay slightly higher mortgages rates on their new properties.

The stock market will reach new highs in the Spring, immediately after Congress invokes the 25th Amendment – perhaps twice - and makes Paul Ryan the President.    Amazon and Apple will become the first US companies to have valuations over $1 trillion.  Chip stocks will also explode the upside as it becomes apparent that AI presents a greater tech opportunity than anything we have seen in technology in over 25 years.

The stock market then begins to fall.  Some people will attribute it to an implosion in Bitcoin, but new regulations concerning social media cause advertisers finally to realize how much of the activity is bots creating nonsense.  Health care holds the market together, performing well after the mid-term elections deliver a Congress that begins to pass legislation recognizing the importance of continued innovation in this sector.    Nevertheless, the S&P ends the year at 2300.

Oil prices will begin to climb, even briefly hitting $90 a barrel as a result of continued instability in the Korean Peninsula and Saudi Arabia.  The dollar strengthens due to higher interest rates.  Gold also strengthens after bitcoin’s collapse.  As a result, emerging markets and global markets sell off even more than the US markets.  We see dramatic falls even in those markets that are oil and gas-based after Russia experiences deep political instability around the World Cup. 

And, here is the most important prediction.  When we reach the end of 2018, Americans will look back at the beginning of 2018 and be pleased that our democracy is still intact and that our country remains based on a law-based state.   The assault on America’s foundations will seem like a distant memory.

So, there are our predictions.  Like in years past, a lot of this is probably going to be wrong so it should all be taken with a grain of salt.  Under any circumstance, you shouldn’t trade on it.


What Jerome Powell’s Confirmation Means for You

Rate information contained on this page may have changed. Please find latest savings rates.

Like any American who has one iota of intelligence or historical perspective, I am outraged by our country’s loss of civility and direction at the hands of the Republican (now Trumpian) Party.  The tax bill, in particular, is an assault on all Americans outside the billionaire class.  The country feels like France circa 1788 and our least desirable elements are turning us into a banana republic.

However, Jerome Powell’s appointment is not an assault on Americans.  Rather, it is a benefit to consumers.  Powell is clearly intent on pairing back post-2008 legislation that was well intentioned but which has had adverse consequences.  Rules applied to the banking system through Dodd Frank and other legislation were designed to protect the financial system from “too big to fail”, but have ironically created a situation where the 8,000 commercial banks that aren’t Chase, Citibank, Wells Fargo and Bank of America have been unable to be competitive for over a decade.  Instead, they have been busy paying Accenture, Deloitte and Price Waterhouse fortunes to ensure compliance with obscure rules.

As these rules are paired back, Americans will find increasingly competitive savings rates and CD rates from banks geographically near them.  Credit unions also will be able to compete.

And, these same institutions will be able to offer more competitive rates on their mortgage, home equity and auto loan products.

In the end game, Americans will win from increasing competition, at least in the short term.

There is competition for your money.  Take advantage of it by exploring a map of banks near you.