News Column

JOHNSTON: Time to think about our investments

July 17, 2014

By Donnie Johnston, The Free Lance-Star, Fredericksburg, Va.



July 18--IS FEDERAL Reserve policy leading us down the road toward another recession?

I did something recently that I vowed a decade ago I would not do again: I took a sizable chunk of money out of savings and invested it in the stock market.

Why? Because for the past five years that money has been in a certificate of deposit earning practically no interest.

Since the Great Recession walloped us and the Fed lowered the prime rate to practically zero, getting even a 2 percent return on any form of savings has been a struggle.

This money, invested for five years, was pulling me down a whopping 1.6 percent. I might as well have had those dollars stuffed into my mattress.

So, when Apple split its stock, I bought a chunk. I am an Apple user and the company makes good products. I figured it was as safe as any stock on Wall Street.

Maybe I'm the only person who is tired of getting 1.5 percent on CDs but I don't think so. More and more ordinary investors are likely thinking as I did and moving money back into stocks.

Yes, the stock market has had an exceptional run since it bottomed out five years ago. The Dow Jones Average and the S&P 500 keep setting new high records with the NASDAQ again flirting with the 5,000 mark.

But those run-ups have been accomplished in great part with low-to-moderate volumes. Many people, bitten by two crashes in the past 15 years, have been staying away from Wall Street.

With the Fed keeping interest rates down to practically nothing, however, people like me are getting tired of watching the big boys earn 7 or 8 percent on stocks while we get 1.5 percent on CDs and .35 percent on passbook (that's the old term) savings.

In other words, more and more people are creeping back into a stock market that looks like it may soar all the way to the moon. The big question is: What happens if there is another crash?

Investors are going to take another beating and our still fragile economy will be set back another five years.

As I have stated before, I saw no reason to drop interest rates as low as the Fed did five years ago. While intended to spur borrowing and push the economy back into at least second gear, all it really did was penalize those who have kept their money in cash with hopes of living off the interest.

Yes, low interest rates helped with the refinancing of home mortgages, but it did little to boost actual home sales, which are still lagging far behind those of a decade ago.

Big companies didn't borrow money to expand because product sales were down and workers had already been laid off. Credit restrictions became so tight that small businesses had a difficult time getting money to expand or even stay afloat.

Ah, but the banks made out like bandits! The banks! Remember those guys that the government said were largely responsible for the Great Recession, those guys who were handing out money on a handshake and wound up taking big losses when the economy tanked?

Well, now the banks give guys like me 1.5 percent interest on CDs and then make me a car loan at 7 or 8 percent. What ever happened to the days when you got 6 percent interest on savings and got a car loan for 8 percent?

Banks back then seemed to function just fine on a 2 percent profit margin but now, thanks to Fed policy, they're getting upwards of a 7 percent margin. So much for Washington punishing the banking industry.

One of the Fed's prime concerns when keeping interest rates low is the danger of inflation.

What inflation is that? Except for some government workers and teachers, practically nobody has had a raise in five years. Gasoline prices have remained relatively stable and, except for beef, so have food prices.

Inflation is not a problem and there are no signs that it will be. So, why keep interest rates at all-time lows?

All that policy is doing is pulling people off the wagon and luring them back into the stock market.

And if the market crashes again ...

Donnie Johnston:

djohnston@freelancestar.com

___

(c)2014 The Free Lance-Star (Fredericksburg, Va.)

Visit The Free Lance-Star (Fredericksburg, Va.) at www.fredericksburg.com/flshome

Distributed by MCT Information Services


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Source: Free Lance-Star (Fredericksburg, VA)


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