Tuesday, September 27, 2022

As the Market Gets Crushed, Look Who's Having the Last Laugh

By Herb Greenberg

The topic of 'savers' is never popular if you write about investing...

It's also enough to get you laughed off the stage on financial Twitter, or "FinTwit," as it's called.

But the market is finally starting to go their way.

Think about it...

Much of the recent mania was driven by millennial investors who were old enough to only know a world of low interest rates and rising stocks.

It was free money, and it sucked in everybody. "The fear of missing out," or FOMO, was justified by "there is no alternative," or TINA... because there wasn't.

As I wrote in the November 23 Empire Financial Daily, just days after what turned out to be the peak in the Nasdaq Composite Index...

Fear of missing out while everybody else appears to be easily getting rich is a powerful driver into lower-quality investments... especially those driven by a sexy story or seemingly credible narrative.

Just ask anybody on a fixed income, or anybody prudent enough not to buy into the hype.

And now? Guess who's having the last laugh...

Or as my old friend, the brilliant journalist Allan Sloan, wrote in the Washington Post last week...

Call it "Revenge of the Savers," whose interest income had gotten vaporized by the Fed twice in recent years. But now, their income is creeping up a bit.

As Allan went on to write...

I've written numerous columns about how prudent, conservative savers were getting screwed by the Fed lowering rates to almost nothing to help bail out the imprudent and bolster the economy.

Now, savers are getting a bit of their own back.

Sure, I don't want to see the return of the days of double-digit money fund and Treasury bill yields, like we had in the 1980s when inflation was running wild.

But it sure is nice to see tens of millions of people getting yields on safe, short-term investments that include a number to the left of the decimal point rather than looking like a rounding error.

Even then, true savers who don't have brokerage accounts aren't getting the full benefit...

I'll use my own experience as an example...

In recent weeks, in my Schwab retirement account, I've been alternating between buying CDs and six-month U.S. Treasurys, as they leapfrog over each other with higher rates.

The kicker: Through Schwab, I recently bought a six-month Wells Fargo (WFC) CD at 4% ($25,000 minimum).

However, if you were a Wells customer buying at Wells – according to the Wells Fargo website – the best you could do is about 1% if you opened a special account with a $5,000 minimum, but otherwise 0.02%. No better if you put in $25,000. That's no better than you would get in a standard savings account at Wells, and it doesn't really matter how much money you put in.

JPMorgan Chase's (JPM) Chase Bank and Bank of America (BAC) were only barely better.

The reason is that CDs bought from brokers, also called "brokered CDs," generally have higher yields than banks.

Higher, yes... but a spread like we're now seeing? That's absurd. The banks are the ones laughing all the way to, well, the bank.

Moving on, some thoughts and comments...

  • Scrolling through the news feed at Prometheus Alts, a new financial website geared to connect individual investors with alternative investments, founder Michael Wang recently posted this:


"There's nothing in this world, which will so violently distort a man's judgement more than the sight of his neighbor getting rich."

– J.P. Morgan, 1907

History repeated itself this last couple years as people saw their Crypto bro and Meme stock neighbors get rich – and they too wanted to jump on the wagon. What they didn't realize was that the wagon was already sinking in quicksand...

Humans being humans, that's easier said than done, of course... but it's worth keeping in mind for next time. As Tulip mania from the 1600s proved so well, there will be a next time.

  • If you have two hours to spare, Alix Pasquet's presentation – "Learning for Analysts and Future Portfolio Managers" – is exceptional. Alix runs the Prime Macaya Capital Management hedge fund, and this synopsis of his talk by Frederik Gieschen's Neckar's Minds and Markets newsletter includes links to a video and podcast.

One of my favorite lines...

We've never seen a bear market with the current market structure.

That's surely something to keep in mind when you see the "experts" try to predict what will happen next.

We'll finish today with the mailbag...

My recent essay on why it's important to keep higher mortgage rates in perspective prompted one reader to reply with his own experience...

"Hi Herb, boy do I remember the mortgage rates of 1981. I closed on my first house in early January with a rate at 12.75%. That rate was a 3-year ARM! I locked the rate in on a Friday in November 1980 just before the Federal Reserve increased rates. A lot of people told me to wait but my gut said that 12.75% was the best I was going to get. Sure enough on the day I closed the rate was 14.125% for the same 3-year ARM.

"My second house (and the one I'm still in), my wife and I had an interest rate of 9.5% which we closed on in June of 1989. It was a fixed rate mortgage and I must have refinanced it 5 times before paying it off about 7 years ago. The mortgage company I had at the end had no fee refinancing (all I had to pay was the recorder's fee which was like $50 at the time). Multiple times when I refinanced at the end, I had a 15-year loan but was paying it off a little quicker as at that point the amount of interest was so low that I no longer got any benefit at tax time.

"When I tell my daughter and son-in-law my story of mortgage rates they look at me in horror! Thanks for the trip down memory lane." – John B.

Herb comment: My pleasure, John. Those were crazy times... I hope our kids are never forced to go there.

As always, feel free to reach out via e-mail by clicking here. I look forward to hearing from you.


Herb Greenberg
September 27, 2022