Over this past weekend we've had one of the largest bank failures in
history (IndyMac) and another of the largest Federal bailouts in history-
the promise to provide capital to Fannie Mae and Freddie Mac.
Where will that money come from? Either through the "liquidity creation
Federal printing press" or by borrowing from those who are sitting on
the dollars we've sent abroad this past decade.
Either way, we're setting the stage for higher interest rates brought on
by inflation (too much money creation) or by our borrowing demand, as
global lenders demand higher rates to compensate them for the
possibility that the Fed will continue to create "liquidity" - and that
those dollars will lose value against other currencies or assets.
Now, there is another side to this coin: The economy could slide
further, reducing domestic borrowing demand from individuals and
businesses. Those who believe in this scenario are predicting even
lower interest rates because of a deepening recession, or worse.
That's a possibility, but my view is that at some point the Fed will turn
on the liquidity pump to rescue everything they can in the
economy, except perhaps the automakers. And more liquidity is
the recipe for inflation and higher interest rates down the road.
Tip: Lock in fixed rates now on your mortgage. Pay down floating
rate debt. But I've been saying that for years!
Your Insured Bank Deposits
While I certainly do not worry that there will be massive bank failures,
I have always advised you to keep bank deposits below the insured
minimum of $100,000 per person, per bank.
Yet only 61% of all bank deposits are insured according to the FDIC -
leaving more than $2 TRILLION in uninsured deposits in the system!
Uninsured IndyMac depositors could lose as much as $1 billion in
deposits.
The rules regarding FDIC insurance are featured in my special column
of July 13th on deposit insurance, which you'll find posted prominently
at TerrySavage.com and theStreet.com, along with a link to the FDIC
website, which describes the rules in more detail. By the way, that
column made the "Top 5" stories on YahooFinance.com on Sunday,
July 13th.
I think the issue of insured deposits is so important, I'm reprinting
below my 3-step "To Do" list from my column to remind you to assess
your deposit risk.
1. Make Sure Your Bank Accounts are Insured Deposits!
Banks offer many types of investments these days, and some that "look
like" insured deposits. Now is the time to make sure that products
purchased inside your bank are actually insured deposit accounts. Ask
that question directly, and ask your "banker" to show you the language
of your account agreement that confirms the deposit insurance.
2. Check Your Insurance Limits
If you have amounts above $100,000 in your bank, you may want to
move money by wire transfer to another insured deposit institution.
That could mean having the interest earned on your jumbo CD sent to
you,each month, instead of accruing to your account. And don't forget
that balances in your checking account will be added to your other
deposit,accounts.
3. Use Alternative Safe Investments
You can purchase Treasury bills - the world's safest and most liquid
investments - directly from the government at
http://www.TreasuryDirect.gov. The minimum investment is now only
$100, but you can purchase much larger amounts, in effect getting the
government's IOU for money that is far above the deposit insurance
limits.
The Economy
Meanwhile, oil prices continue near record levels - although they show
some signs of backing off, as desperate consumers cut back on non-
essential driving trips. Of course, that bodes ill for the economy -
ranging from auto manufacturers to summer vacation travel businesses.
And while you may stop driving, it will be more difficult to cut bank on
"non-essential" heating bills this coming winter!
Americans are coming to a recognition that I've stated in past
newsletters: this is no ordinary recession. In fact, most Americans
don't remember the long recession of the early 1980s, and are expecting
only a short-term slowdown. But consumer bankruptcies will continue to
grow, as people can no longer turn to their homes to extract money to pay
down debt, much less ordinary living expenses. And the continuing high
level of foreclosures means there will be longer-term pressure on
housing prices.
Those of you who read my columns know that I believe in the future of
America. But we only have a great future if we are willing to face up to
it honestly, and demand that ALL the politicians we elect do something
besides juggle our money, promising us benefits that will only cost us
more in the long run.
Consumers have learned a lesson about borrowing too much. Must
government pay a similar price to learn this lesson?
The Stock Market
I've saved this section for last because you know I never make stock
market predictions. I do try to assess the current situation honestly.
And so I'm in a tough spot here. You also know I'm a long-term
investor, and you have often heard my reasoning behind this view:
"There has never been a 20 year period when you would have lost
money in a diversified portfolio of large company American stocks,
with dividends reinvested. Even adjusted for inflation you would have
been ahead for every 20-year period since 1926."
That's why I will always have a portion of my money invested in a
diversified portfolio of stocks. It has truly worked for me over the
years! And I do not hesitate to offer that advice to those who have
a long time horizon to build capital for retirement - or are investing
beyond their own retirement for future generations.
But as I write in my column of July 14th available now at
http://www.TerrySavage.com, there comes a time when personal
perspectives and risk tolerance change. At least, that's
happening to me!
That long time horizon that helped you build capital for retirement
suddenly develops a shorter term perspective. And the risk tolerance
you had a decade ago is tempered by a desire to preserve capital.
Of course, if I'm correct about the inflation scenario predicted at the
start of this letter, I must remind you (and myself) that stocks are one
of your best hedges against inflation! Money market funds and other
"chicken money" alternatives such as Treasury bills or CDs, just barely
keep up with inflation. They certainly don't beat it - especially after
taxes. But having a portion of your assets in safe, liquid investments
does allow you to sleep at night with your appropriately diversified
stock portfolio.
So what I'm suggesting is that you take another look at your asset
allocation. I've long recommended investments in inflation hedges,
such as gold and natural resources mutual funds. Those help balance
your exposure to the general stock market, and typically give you
something to cheer about when the market is down.
As I write this letter, before the market opens on Monday, July 14th, it
looks like this latest "pacifier" bailout of two more financial giants will
give you some breathing room to do your own assessment of your own
financial and investment situation. Take the time to do that, in
consultation with your financial advisor, while you can do so calmly.
Then make your decision and stick with it even as emotion tugs at you.
Continue to believe in a better and more prosperous future. That's
always what's happened in America. And I have no doubt that some
new invention, perhaps based on nanotechnology, will once again give
America its opportunity to demonstrate that our free enterprise system
-- and free markets -- are the best system ever devised to give the
most people the most prosperity. That's The Savage Truth.
Terry Savage Productions
350 N. Orleans 9th Fl
Chicago, IL
60654
US
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