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Personal Finance Blog By MoneyRates - March 2012

Road rage: The truth about gasoline prices

March 30, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Americans are outraged over the steady rise in gasoline prices, and as president, Barack Obama has to take responsibility for what happens on his watch. A recent Reuters/Ipsos online poll indicated that 68 percent of Americans disapprove of how Obama is handling rising gas prices.

While the backlash is inevitable, it raises a key question: How much control does the President really have over oil and gasoline prices? How people perceive the answer to that question could well decide the results of the next election.

A sensitive issue

Gasoline prices are an especially sensitive issue right now, for a few reasons:

  1. The economic recovery is fragile. The economy is growing again, but rising oil prices nearly stalled the recovery a year ago. It could happen again.
  2. Gas price increases seem out of whack. With low wage increases and even lower interest rates on savings accounts, seeing gas prices rise by over 8 percent in a month is pretty galling to most people.
  3. It is an election year. High gas prices look like they could be a key point of vulnerability for Obama, so expect his opponents to keep the issue front and center from now until November.

Revealing facts about oil prices

There's no doubt that Obama will be held accountable for gas prices, but how much impact has he really had on them? Fast-rising prices are grabbing headlines, but some additional facts can lend a more detailed perspective:

  1. Oil prices were actually higher four years ago. For those who associate high oil prices with Obama's policies, it may come as a shock to note that while a barrel of oil was $105.11 as of March 15 of this year, it was $110.21 on the same date four years ago.
  2. There is a fair amount of financial speculation in oil prices. Looking at oil futures, prices are much lower if you look at contracts expiring in a couple years or more. This is fairly unusual for a commodity like oil, which normally would be presumed to rise with the rate of inflation (at least) over time. This type of inversion was very much in evidence just before oil prices peaked in mid-2008, and suggests that financial speculation may be playing a role in current prices.
  3. Lately, gas prices have continued to rise even though oil prices have stalled. Oil prices more or less levelled off in the first half of March, while gasoline prices continued to rise. So far this year (as of March 19), oil prices were up 9.4 percent, while retail gas prices were up 16.8 percent. Could oil company profiteering be at work here?

With the Presidential election coming up, high gasoline prices will provide one key test of Obama's leadership. Releasing strategic oil reserves could provide some short-term relief for gas prices, but it would be a very risky move in a world where oil supply is hardly reliable. It will be interesting to see whether the President can resist the temptation to take this risk for the sake of winning a few more votes in November.

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What Chinese steel means to US savers

March 22, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Sometimes the world economy seems like a giant spider web: Touch one part and the vibrations are felt throughout the structure. So it is that slowing demand for steel in China could have an impact on U.S. savings accounts.

This week, BHP Billiton, a major supplier of iron ore for Chinese steel production, warned that demand from China was beginning to plateau. You can connect this fact to U.S. savings accounts through these three things:

1. The growth expectations for the Chinese economy

News that China's demand for iron ore is leveling off raised concerns over whether China could sustain its robust growth rate. The Chinese government has lowered the target growth rate to 7.5 percent -- below the recent growth rate of 8.9 percent, but still a pretty hot pace of growth. However, managing an economy is not an exact science. It is possible that the Chinese government's attempt to ease growth a little will result in an overreaction toward slower growth.

2. China's role as a trading partner with the U.S.

People tend to focus on imports from China, but according to the U.S. Census Bureau, China has been the third largest consumer of U.S. exports so far in 2012 (behind only Canada and Mexico). So, slowing growth in China means less demand for some U.S. exports, creating a potential drag on economic growth.

3. The relationship between economic growth and savings accounts

Broadly speaking, economic growth generally creates conditions that lead to higher interest rates. This can be a function of higher demand for capital and/or higher inflation expectations.

The relationship between growth and interest rates in the U.S. is especially sensitive right now because the Federal Reserve has committed so heavily to low interest rates as a source of economic stimulus. Rates can't rise unless the economy strengthens, yet it remains to be seen whether economic growth could survive a rise in rates.

Foreign trade could be the X factor in this delicate relationship. Strengthening foreign demand could give growth the momentum it needs to withstand rising interest rates. On the other hand, weakening foreign demand could make the economy even more dependent on low interest rates, thus dimming hopes for higher rates on savings accounts anytime soon. This is the connection between this week's news from China and U.S. savings accounts.

Of course, besides being inter-connected, the global economy is like a spider's web in that it is easy to get caught up in it. U.S savers should know this well -- it seems CD, savings, and money market rates have been stuck in a sort of web for years now.

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Will the bond market rescue savings accounts?

March 16, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The Federal Reserve's optimistic outlook on the economy following its March 13 Federal Open Markets Committee meeting proved enough for the stock market to mount a steep late-day rally. But obscured behind the stock market headlines was the fact that bond market interest rates also made an impressive surge.

Interest rates on savings accounts, money market accounts, and other deposits are less sensitive to short-term fluctuations than bond market rates. However, the rally in bond rates, and the reasons behind it, is an optimistic sign for the future of savings and money market rates.

The rally in rates

In a sense, it is counter-intuitive to talk about a rally in interest rates, because rising bond yields result from a fall in bond prices; i.e., the opposite of a rally. Still, all of this is a sign of optimism about the economy. It marks the willingness of investors to leave the safe haven of U.S. Treasuries and move into riskier securities.

However, it will take more than a one-day rally in rates for any of this to affect savings accounts. 10-year Treasury rates rose by nearly 8 basis points on March 13, and by a total of 16 basis points for the past week. Looking longer-term, though, Treasury rates have moved mostly in a saw-toothed fashion so far in 2012, with every zig upward followed by a zag downward.

Are rates finally ready to break out of that pattern and make a sustained move higher? It all depends on the continuation of good economic news.

Higher interest rates -- with or without the Fed

Note that this discussion of higher rates does not center on the Federal Reserve, which is continuing its commitment to trying to keep rates low. Remember, though, that not even the Fed can compete with the buying power of the bond market. If that market decides rates are moving higher, all but very short-term Fed funds rates will be affected.

What you should do

While waiting to see if the rise in bond rates carries through to rates on savings accounts and other deposits, here are two things you should do:

  1. Keep your commitments short. If interest rates are poised for a move up, this could be a bad time for a commitment to a long-term CD.
  2. Keep a close eye on the marketplace. When rates start to move, not all banks will react at the same time. Even in a stagnant rate environment, the best savings accounts have offered rates well above the average, and those differences might become more pronounced in a more active rate environment.

It's tempting to say that the third thing to do is keep your fingers crossed. For nearly three years now, this economic recovery has been a series of false starts and setbacks. Rates on savings accounts and other deposits won't rise until positive economic momentum is firmly established, and that will take a continued run of good news without a major disappointment.

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Stock market tumble takes interest rates with it

March 7, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Yesterday the Dow Jones Industrial Average suffered its worst day of 2012 so far. Ordinarily, that news wouldn't affect depositors in savings accounts, or might even reaffirm their conservative choice of investment. This time though, it represented yet another setback for savings accounts and other deposit vehicles.

The problem in this case was that the tumbling stock market dragged interest rates down with it. Any decline in market interest rates is another sign that depositors could have an even longer wait before they see higher CD, savings and money market rates.

What ails the market

The Dow fell 203.66 points yesterday, representing a 1.6 percent loss in a single day. This was the first loss of this magnitude since just before Thanksgiving. Along with stocks, 10-year Treasury bonds dropped by 6 basis points in one day, for a total drop of 9 basis points in three trading days. Think of the bond market as a barometer for interest rate trends that will ultimately affect savings accounts, and as such these recent events mean the outlook is worsening.

Once again, the Greek financial crisis raised its ugly head. There are essentially two types of fears associated with that crisis. Or, to put it differently, you can pick which poison you fear more -- the quick-acting one or the slow-acting one:

  1. The quick-acting poison is that a disorderly default by Greece, because of failure to reach a settlement agreement with bondholders, would trigger a series of defaults by financial institutions that found themselves suddenly caught short of liquidity. Basically, it would be back to the brink as in 2008, only with central banks already having exhausted some of their options for dealing with such a crisis.
  2. The slow-acting poison is the scenario in which Greek debt is unwound in an orderly manner, but austerity measures by Greece and other distressed European nations cause a sharp drop-off in demand from that continent, slowing global economic activity.

In the case of yesterday's sell-off, it was fear of the quick-acting poison that gripped the stock market. Neither is an attractive proposition, but at least with the slow-acting poison there would be more of a chance for other factors to counteract the damage.

A partial cure

Both the stock market and the bond market have fallen into a pattern lately in which they react optimistically when the focus is on developments here in the U.S., and pessimistically when foreign issues come to the fore. There will be an opportunity to re-focus on the optimistic side of the ledger this Friday when February employment numbers will be released -- if those numbers can follow through on the improvement of recent months.

Still, this will only be a partial cure. A strengthening U.S. economy would help counter the slow-acting poison of slowing European demand, but it would be powerless against the quick-acting poison of a global financial crisis.

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Are you a tax do-it-yourselfer?

March 1, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Recently, MoneyRates.com, in conjunction with GetRichSlowly.org and MSN Money, conducted a poll asking people how they prepare their tax returns. The results suggest that MoneyRates.com readers may take a more independent approach than the broader population.

The poll was connected to an extensive GetRichSlowly.org study of tax preparation options and their costs. Overall, the results found that 49 percent of respondents pay someone to do their tax returns, while a similar number, 48 percent, handle the returns themselves, either by hand or with the help of tax software. However, isolating the results from MoneyRates.com and GetRichSlowly.org tells a slightly different story.

Combined, 66 percent of the respondents to these two sites reported preparing their own tax returns, compared to the 49 percent from the overall poll. This means that far fewer respondents to MSN Money prepare their own tax returns.

Why the difference? It's hard to say for sure, but discussing some of the possible reasons helps illustrate what goes into the decision of preparing your own return or paying a professional to do it. Here are three possibilities:

  1. The MoneyRates/GetRichSlowly audiences may be more do-it-yourself oriented. All three of the websites are related to personal finance, but MoneyRates.com and GetRichSlowly.org have more emphasis on do-it-yourself content. In the case of MoneyRates.com, it may be where to find the best CD rates, what trends are affecting savings accounts, or how to avoid checking account fees. With GetRichSlowly.org, you are likely to find practical advice on changing your spending habits and building savings over time. Either way, this hands-on approach may be reflected in the way visitors to these sites tackle their taxes.
  2. MSN Money audience members may have more complex tax situations. On the other hand, MSN Money carries more coverage of global financial markets, and people with investments of that nature may have more complex tax situations. That might explain why these poll respondents were less likely to do their own taxes.
  3. The MoneyRates/GetRichSlowly audience may be keeping a close eye on what affects their taxes. If you put the above two theories together, a third possibility emerges: The audience for MoneyRates.com and GetRichSlowly.org may be more likely to handle their own investments, while the MSN Money audience might be more likely to employ financial advisors. The link between this and tax preparation is that when managing investments, it is useful to know what drives tax liability, and handling your own tax returns will give you an in-depth feel for this. Not that tax considerations should drive your investment approach -- after all, better to pay the tax on a large gain than to have no gain at all -- but they should inform that approach.

The contrast in the results is interesting, but no matter how you approach your taxes, the important thing is to get them right. The article on GetRichSlowly.org has some tips and information that can help you decide which approach is right for you.

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