The New Normal. Low Interest Rates Forever.

The markets, investors, consumers, politicians, and most importantly savers had better come to the grip with the fact that we have low interest rates for as far as the eye can see right now.  The New Normal is a normal where consumers spend less, banks lend less, and putting your money in a FDIC insured savings account is not going to cut it for any real income.  This is as is was in the late 1930's and since we are reliving that economy one can expect low interest rates for at least another decade plus.  I would bet another couple of decades. 

The Federal Reserve has been saying low rates forever for some time now as any attempt to raise the federal reserve rate has been met with stock market sell offs and most importantly the US ten year Treasury Bond selling off down to right at 1.6% and today is still trading below 2%.   Bond ghouls are fear ghouls and those same traders know what is becoming obviously to everyone except those who pine for a pro-growth economy we are dead in the water for a long time.  Like it or not the idea of thinking the real normal for lending rates is somewhere in the 3% to 5% range and ten year bond rates is silly, almost as silly as the same people thinking a return to the gold standard will solve all our currency issues. 

The reasons for this are quite simple.  Millennials and Generation X having either been born into or lived through the Great Recession have cut spending and cut household costs to the bone.  They are saving their money and holding onto jobs too. In the past this would have been considered a good thing when the Greatest Generation having itself lived through the Great Depression put spending on hold and saving on cruise control.  These generations are not buying homes and taking on debt and when they do are making sure to buy what they can afford if and when economic times turn down again.  They are not buying new cars either, the recent surges in vehicle buying has been mostly done by those over 50 years old in secure jobs or safely in retirement with disposable income.  The are buying into "experiences" like inexpensive travel and dining out, which is cheaper than big ticket items and can be done on a debit card.  Nothing tells this story better than the fact the credit card companies are getting hit hard right now by the significantly heightened use of debit cards by the younger set. All this in turn mean banks have lots of money to lend and no one to lend it to. So with no demand for loans there is no demand for savings to lend.  Rates stay low on both ends. 

Politicians best come to understand this new normal.  There is going to be a reckoning day with deficit spending and over allocated medicare and social security accounting too.  I will bet with anyone right now as the more adult leaders in the Generation X, supported by more sober leaders in the Millennial ranks assume more power in Washington DC as many have in state capitals there will be a changing of how the Federal Government spends, or more precisely NOT spends. 

There will not comeback for the markets and investors need to get on board here too.  The markets will move up and not go backwards as some expect, but that moving up will be in the 4% to 6% category, not the former double digit gains annually we have known in the past.  Much of this new normal reset is the fact that with inflation low and consumer prices growing at a snails pace that market gains will be similarly depressed.  However with interest rates at 1% and a market growing at say 5% the result are assets there growing correctly as compared to inflation.  Again we suggest S&P 500 index funds for most people and a sprinkling of managed stock assets to add some additional protection to long term growth.   What will likely happen is many people will keep their savings in saving accounts freeing them from stock market fear which is so recent to most workers. 

Some advice for you savers who worry about markets.  Your ancestors who lived through the Great Depression did the same and kept passbook savings accounts and such for years to avoid stock market crashes.  That portion of our history is past us now so put some of your hard earned savings into the stock market and you will be ahead of your peers several decades from now when you are looking into the retirement years. 

This new normal is frankly not so bad if you consider the change in spending and savings habits of younger workers.  Maybe we need to get used to a no growth economy and learn to invest and live in it.   Stock buy backs and safe dependable dividends from large corporations is still something to desire if you have assets to invest or building assets to invest.  Slow growth and stable markets can be rewarding if you are taking a long term view and a long term view is the best choice for smart savers and investors. 

Investing and Living in a Gone with the Wind Economy

We live in what can be called a Gone with the Wind Economy.  Lots of companies doing nothing to grow, lots of people sitting home doing nothing, and the federal government doing nothing to make it better.  As we have stated in the past we see little to change that scenario through 2016 and frankly well into the next four plus years unless voters come to their senses and elect some pro-growth leaders.  As for pro-growth leaders we have heard little of that kind of talk in the current presidential campaign, so therefore one can expect the same old economy we got now to live on for some years past 2016. 

We have opined in the past that the current political economy which spends deficits to oblivion and the federal reserve that keeps interest rates rock bottom misappropriates cash and resources to the rich while keeping the lower classes satisfied with just enough of government largess.  Sorta like the Old South in Gone with the Wind, where the slaves toil and get by and the rich landowners live a charmed life.  Indeed both blacks and white in the lower and middle classes seem pleased and willing to accept less by living on today's plantation, that being the government plantation.  If they work it is at jobs that require little skills and more than likely part time due to Obamacare.  They get by with some food stamps, maybe some welfare checks, and more and more on Medicaid,  which more and more doctors refuse to take due to lower and lower pay outs for services rendered.  Many do not work at all as the real jobless rate is likely in double digits and the labor force participation rate is about 62%.  Much of this not working is the lack of desire to go get skill sets that are in demand, better to blame someone or some company for shipping what is basically the low wage low skills jobs to some offshore location than get up and learn a marketable skill.  The government's hand in this is obvious to anyone who wants to look and that is the now almost sacrosanct $15 minimum wage rate. Trump has made hay blaming everyone for what he and other politicians support in the higher wages to appease the few employed and harvesting votes from those not employed.  The mob is restless, but they are not going to change much unless they get smart and get jobs and get smart and vote pro-growth. 

The well off, called the rich by the media, enjoys the current environment.  Low rates mean they can buy homes and cars with assets they already have at cheap long term payments.  The well off can invest in companies where the low rates allow companies not growing to buy back stock and doing so issuing tax advantaged debt at long term dirt cheap rates.  Those stock buy backs make stock prices move up and the lessening stock float means more concentrated ownership of companies by those same well off owners. These same companies use some of the cash to raise dividend pay outs regularly to keep the well off, well, well off in their lifestyle. Talk about life in the plantation home this is it on steroids. 

Now if you are in the lower and middle classes the best investment you can make is get a skill that is in demand, move to where there is demand for that skill, and save your money like mad.  Put most of that money in the mega capitalization stocks where the well off are now and ride the tide upward with them.  At some point you should accumulate enough assets to at least survive the current no growth mess.  If nothing else you can make life better for your children if nothing changes. We again suggest using Vanguard Funds or ETF's,  preferably the S&P 500 index for your assets.  Forget bonds and money market they are losers for you. 

If you are in the well off category you too need to put some assets in the mega caps where your money will grow and keep you up with inflation.   Other assets should be in mega cap dividend paying stocks and some tax free closed end bond funds.  Stocks like AT&T, Verizon, Wells Fargo, and JP Morgan are long term safe.  We also like Triangle Capital and New Media Investment Group for some higher risk in the dividend paying category.  A good mix of Vanguard mega cap funds/ETF's and some safe dividend paying stocks will keep your assets safe long term and provide some cash flow if needed.  As for bonds we like two approaches.  One buy a good number of individual state municipal bonds for safety making sure you buy bonds issued from your state for triple tax free treatment.   Either general obligation and revenue bonds are fine here.  Add some closed end bonds funds for some extra income and frankly safety since low rates are here for a long time. We like VKI here paying over 6% tax free and it pays monthly dividends.  In all this will keep you living in the plantation house until pro-growth policies resume with new leadership. Lastly if you have not taken advantage of the long term below 4% mortgage rates do so, buy a home, refinance your mortgage, or buy a beach home.  You can enjoy them and your heirs at some point will be appreciative of your smarts of locking in those low rates. 

The Gone with the Wind economy is not the preferred choice for those of us who like growth and more people getting to make life better moving towards the top of the ladder, but it is what it is and only fools do not play the hand they are dealt.  If you are living in the plantation house take another sip on the mint julep and enjoy the beach breeze.  If you are living in the poor house get up and find a way out or just accept no one, no government, no politician is going to get you out.  Here is a fact no one will nor any politician will tell you, it takes some sacrifice on your part.  If you do not get up and get going your life will be truly gone with the wind.