Vector Money Management

September 8, 2010

Mid-September Outlook and Portfolio Design

Filed under: Market Comments,Outlook,Uncategorized — vector @ 9:07 pm

As mentioned in our August outlook (see post below), the economy and financial markets continue to struggle with what we call irregular conditions.  One consequence of such conditions that is proving both problematic and annoying for investors is the lack of any return on traditional savings vehicles such as Treasury bills, CDs and money market funds.  As the rates on these instruments drop below the 1% threshold, they begin to act more and more as virtual mayonnaise jars.  Savings and savers have always been a vital and integral part of America’s system of capitalism.  That they should now receive next to nothing for their participation is a sure sign of dysfunction in the system. It should, then, be no surprise that citizens are grumbling, the economy is sputtering and that uncertainty reigns. 

 As you may recall, a key economic mantra of the ‘80s and ‘90s was that government deficits would push interest rates up – now that logic has been thoroughly discredited by next-to-nothing rates coinciding with all time high government spending and borrowing. 

 This paradox of almost “no-cost” money and a lethargic economy is stark evidence of the complexity of the national and global economies and the myriad interdependencies therein that create unforeseen challenges and problems when policy makers meddle as boldly in the financial system as they have over the past several years.

 What is today’s reality?  That the Federal Reserve’s primary concern is a further drop in commercial and residential real estate prices – assets that represent trillions of dollars in collateral on bank balance sheets.  Their first priority has become preventing another downturn in real estate prices.  The empty return for savers is a discouraging side effect. 

 While the Fed may be able to offer “no cost” money to banks that qualify, there is still no free lunch.  History shows that the usual result of predicaments such as this is inflation.  Savers beware.

 Ashby Foote

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