BG 16122008
MONEY FOR NOTHING AND YOUR CHECKS FOR FREE
Ok, so we now have the Federal Reserve Bank’s Open Market Committee (FOMC) trying to get the financial markets to lend money for nothing.
The FOMC came out today with its target rate for Fed Funds at a range – rather than a specific target rate of between zero and 25 basis points or 1 quarter of 1 percent. That’s fine – since the FOMC doesn’t lend money in the Fed Funds market – as only member banks actually lend or place cash in this market for needed or excess reserve balances.
But interestingly enough – the FMOC actually admitted this in its statement today as beyond its declaration of its target rate range for Fed Funds – it also empathized that the Fed was and would continue to operate as a direct participant in short term lending for member banks.
This of course is part and parcel of the huge ballooning of the Fed’s balance sheet as it is quickly becoming the world’s largest commercial bank – lending to pretty much any company – from banks to even commercial operating companies via its commercial paper lending and guarantee program.
And – this also is occurring as more and more companies are turning themselves into banks – to better grab more of this ever freer cash from Uncle Sam Inc’s banking division otherwise known as the Fed.
The trouble is that while many in the media might champion this move as a means of getting the credit markets moving and advancing – how many banks and financials do you know that are rolling out the red carpet to lend cash out at zero percent?
Well, perhaps more than you’d think.
That’s because that’s what is happening as banks place reserves with the Fed – they’re getting pretty much squat these days – and less after the moves today.
And for longer term parking of cash – Uncle Sam’s investment banking division – more commonly called the Treasury is reaping the benefits of free money as shorter-term bills and older notes are being placed and traded at or very dearly near zero rates of yield.
This can’t last of course – as too many investors out there can’t live on investing at zero rates of return.
And while you might ask – isn’t zero better than negative whatever rate of loss – there are more and more serious institutions that are ditching this whole thing that we’re doomed and putting more cash to work beyond just parking it with Uncle Sam for nothing.
Corporate bonds and bonds from governments beyond the
This doesn’t mean trusting the ratings agencies – such as the sell-outs otherwise known as S&P, Moody’s and Fitch – but rather doing your own homework on the credibility of issuers.
This is also expanding to municipalities – especially when it comes to states that have plenty of power of taxation – and yet have bond yields that are multiples of underlying Treasuries.
My bottom line is that rather than sticking your head in a dark hole and accepting zero rates of yield – continue to buy and own some of my favorite bond funds that continue to pay well – and more importantly continue to earn well to afford to pay well.
In addition, what too many folks are still missing is that inflation isn’t dead. If you look at the recent consumer and producer data – the underlying core rates of inflation are still very much a threat running in the 3 to 4 percent range.
Meaning of course that zero rates of yield are locking in real losses of 3 to 4 percent over a year’s time.
Neil George is editor of By George.
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
