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CD Rates Fall, Where to Invest?

Johns Wu Posted in CD Rates by Johns Wu
January 27, 2009 08:15 PM - 16 Comments

The current environment is horrible for people who are trying to stay in cash.
National CD rates are so disgustingly low that you are guaranteed to be losing money to inflation, the invisible tax.
Treasury bonds, the safest investment class available, are yielding close to nothing.
The stock market is so violent right now that you might lose sleep at night.

So where to invest?

Well, astute money managers like Peter Schiff (one of the few guys who predicted the current crisis) are suggesting commodities like metals and agriculture and getting exposure to international stocks. He argues that hyper inflation is guaranteed and that foreign economies will surpass America in the next decade.

What do you think?

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  1. BloggingBanks said:
    on January 27th at 09:13 pm

    I still believe cash is the best asset class during a deflationary cycle. If we were truly to repeat the Great Depression of the 1929-1932 cash and equivalents ( FDIC insured or treasury) will be the thing to protect your assets.

    Everyone is predicting the end of the world. That’s not going to happen anytime soon. If the US catches sneezes, the whole world economy gets a cold. Where are foreign investors running for safety? Gold? No way – they buy dollars.

  2. Dan said:
    on January 27th at 11:36 pm

    If foreign economies are gaining ground on Americas’ then why not invest in these foreign economies?

    here are some foreign currency CD’s yielding many times our national average…

    http://bankvibe.com/foreign-bank-cds-investing-in-growing-economies/

  3. Bhu said:
    on January 28th at 01:57 am

    Land. I think this deflationary cycle is a result of demand destruction, obviously not because of a monetary contraction. Last year, for the first six months of the year we basically had double-digit inflation regardless of what the CPI said….ask any restaurant owner or homemaker. This is the calm before the storm.

    The US government is going to be borrowing over $1.2 trillion per year for the next few years…this is over $4,000 per person on a population of 300 million. This is an unbelievable amount of money that needs to be borrowed. Would you lend money to the US government for the next 30 years at 3% denominated in US dollars? Absolutely not. There has been a flight to absolute safety which is the only reason treasuries are yielding what they are. Everything else seems too risky. But it does not mean that treasuries are priced properly.

    At the slightest turn in the economy, even stabilization of let’s say 10% unemployment, as soon as the economy stops contracting, we are going to see the slightest growth in demand, and it will set off inflation like our generation hasn’t seen before.

    And it is in every non-savers interest for this to happen. Think about it. For a country of savers, inflation is devastating. For a country of debtors, inflation is the best thing that could happen to them. I think the US government is going to think that it is in their interest to inflate their way out of this mess. People will have 5% mortgages fixed…then inflation will kick in and lift the prices of their houses with inflated dollars. In real terms, there will be no appreciation, but it will be enough to lift the houses above the value of the mortgages.

    The Chinese, Japanese, and Koreans will be scared, but they will be stuck with dollar-denominated assets; they will simply try to convert them to hard assets. Land. US land and real estate.

  4. Larry Hopkins said:
    on January 28th at 03:08 am

    People are getting scared by the media and Internet clowns. Calm down- we’ll get through this unstable cycle..

  5. William said:
    on January 28th at 04:36 am

    Series I savings bonds. Indexed to inflation.

    Only if the US government still honor them a few years from now – there’s nobody in Richmond willing to redeem Confederate bonds anymore.

  6. BloggingBanks said:
    on January 28th at 01:29 pm

    Bhu,

    I don’t buy into the whole hyper-inflation thing. What will cause inflation? Japan in early 1990’s also tried bailing out its banks by putting trillions of yet in them but they have had 2 decades of no inflation, falling stock and real estate prices. Long-Term GVT bonds have been the best investment in Japan since 1990.

  7. Bhu said:
    on January 28th at 03:53 pm

    BloggingBanks, not hyper-inflation, just the normal kind. But for people that save money, even 6-8% inflation can be devastating if they are stuck in long-term vehicles. We simply can’t count on 0% inflation for the next decade.

    With respect to Japan, Japan at the time was the world’s biggest creditor nation; they still are. They owned more of other people’s assets than any other nation. The US is in the exact opposite circumstance. We’re the #1 debtor nation in the world. More people own our assets than of any other country. And we’re going to rely on these nations lending us even more over the next few years. I am not a seasoned thinker about this, but I simply extrapolate this scenario: The problem facing my neighbor that has tons of savings cannot be the same as the one my neighbor would face that has a ton of debt. It just doesn’t make sense. With respect to Japan, when they infused massive amounts of capital into their banks, they didn’t borrow enormous amounts from overseas. The US will have to on the order of trillions. The deficits that we are contemplating are truly enormous. Personally, I think this recession will be like any other; we’ll be fine. Everything will return to normal soon enough, but US interest rates in the early 90s were 8%-10% on mortgages; this is not huge. We have had abnormal interest rates for quite some time to stimulate all of this consumer spending.

    I didn’t say hyper-inflation. Even 6-8-10% would be inflation that the under-40 generation hasn’t seen before. I certainly have not seen this during my adult life. And what you say might be true. I just don’t know.

  8. marketsense said:
    on January 28th at 09:03 pm

    BloggingBanks,
    the main difference btwn Japan and USA in your scenario is that the Japanese are a nation of savers by character. Americans are a nation of spenders…and any policies that sanction consumption over saving will put the US right back in the same place.

  9. Bill said:
    on February 3rd at 04:13 pm

    I don’t know if I have done the right thing or not with my cash but here we go……I’ve invested in bank CD’s ….1 paying 5% APY and another bank paying 4.25%….both are good till the end of 2009…..I also invested in muni bonds paying 8.5% with no federal, state, or local taxes…..I live in MI so no one is paying much attention to the bonds since everyone left the state…..The bonds are in the Oppenheimer fund list if anyone is interested….

  10. Bernz said:
    on February 3rd at 11:02 pm

    Not sure about international market. I think there are more opportunities here in the States right now that the stock prices are very low. Got to do your due diligence though. I have invested in bank CD’s as well although some of my CD investments will expire in May. Current CD rates have been very low but keeping my fingers cross in and or around May.

  11. Dave said:
    on February 10th at 12:29 am

    It seems that the best place to invest today is in real estate, especially considering the inflation that will come due to us printing and borrowing so much money. Tell me if I am wrong. I think Bhu is right on. If you take on a mortgage today, with inflation rise, the value of the house will go up for the owner.

  12. Nancy said:
    on February 10th at 06:29 pm

    I’m not so sure real estate is the best investment. It depends on where you live. I mean, look at this New York Times article.
    http://www.nytimes.com/2009/02/08/us/08lehigh.html
    Do you think buying a house there would be a good idea? I know people who invested in real estate last year because of the same reasoning, and they cannot find renters because of the job market. If you buy a condo then there’s the chance the HOA will raise the fees or go bankrupt if other residents move or can’t make their payments. Not trying to be negative, but I’ve been house hunting and it’s not a pretty picture around here! I suppose it depends on how much money you have to spend, your income, etc. I have a high credit score, but I’d probably have to pay cash, since I didn’t make much money last year. The days of stated income are over. I do agree that buying a home is a good idea, but only if you plan to live in it and you have a secure job. Just make sure prices aren’t still dropping in the area. Also, I’ve read horror stories about sinkholes and other natural (and man-made) hazards of which buyers may be unaware. I once made a huge mistake in real estate, so of course I’m a little more cautious than some people.

    If there is anyone who knows how auctions work, I’d love to know if they’re worth investigating. 2 real estate agents told me never to buy at an auction and to steer clear of short sales.

    I put some money into long-term CDs when the rates were still 5%, and am happy I did. It’s upsetting when a CD matures and the highest rate around is 2%, so I took a chance and just got an 18 mo CD at 3.9% at a 1 star bank (zero on Bauers) I’m concerned about using a poorly rated bank, but I took a chance, praying that FDIC won’t go broke! I’ve always felt fixed annuities are good products, since they are tax deferred, but I’ve been shaking in my boots since Sept. I can’t imagine a company like ING going belly-up, but I never expected Lehman Brothers to fail either. Safety to me is just as important as rates.

  13. Ann Marie said:
    on February 11th at 06:45 pm

    Nancy,

    I bought a house on a short sale…the previous owner had financial problems, so we benefited. If the previous owner was smart, she should have listed it on the market much sooner than she did, and could have gotten at lease 30K more than we offered her. Do not let your Realtor tell you not to buy a short sale….that just means they are not going to get bigger commissions, and they might have to work harder to get a short sale (you have to wait for the owners banks to clear funds, etc.). I would find a new Realtor!! Also, invest in i-bonds.

  14. April said:
    on February 15th at 01:00 am

    It just depends not only on one’s risk tolerance but on how close they are to retiring. I would recommend fixed annuities to anyone who does not want market exposure and who is at least 55 years old. Indexed annuties are another interesting product. They give you the upside potential of the market..of course there is a cap..with no downside risk. I just looked at a product with a cap of 10% and a GMIR of 2%..so over they next 5-10 years there would be a likely chance of beating the rate of inflation. If someone has money that they know is just to be passed on to their beneficiaries they should surely be looking at a “wealth transfer” product with a death benefit. It’s not always just about an interest rate! If you have a long term horizon 10-15+ yrs..you should definately be in the market. HELLO…most everything is “ON SALE” right now :)

  15. t-roy said:
    on February 18th at 11:46 am

    peter schiff is an idiot. he predicted the collapse
    but he told everyone to go to where the most damage
    was to occur after collapse !

    his funds are down really bad.

  16. Ingemar said:
    on February 18th at 04:13 pm

    As a european hedge fund manager, I am short in US dollars. Despite of what BloggingBanks says, foreign investors don´t buy USD for safety reasons, because the US economy is falling sharply. The US sneezes/world gets cold was true ten years ago. After that the US economy has weakened substantially.

    As a matter of fact, me and my collegues are puzzled about the fact that the USD has increased against the major currencies. Our conclusion is that the increase in the dollar rate is due to technical reasons. It happens because of all the deleverage that is taking place when americans are leaving their investments abroad.

    The dollar is going to fall as soon as the markets rise again. And I believe the fall will be pretty hard.

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