Personal Finance Blog By MoneyRates - December 2012
November 30, 2012
On Tuesday, improvements were announced in consumer confidence, housing prices and orders for equipment and machinery. Coupled with early reports of strong holiday shopping figures, this is the kind of news that would normally send stocks soaring. Instead, the Dow Jones Industrial Average lost 89 points.
Simply enough, the shadow of the fiscal cliff is looming over everything. There have been no signs of progress on a budget deal, and when it comes to trying to beat an impending deadline, no news is bad news.
What the fiscal cliff means to the markets
There are two observations to make about the way the financial markets are acting against the backdrop of this drama:
- The stock market is holding the government's feet to the fire. Investors know that if the fiscal cliff measures of higher taxes and steep spending cuts go into effect, economic conditions will be sharply different come January. That's why the market shrugged off the apparent good news on consumer confidence, housing and orders for equipment and machinery. Without a budget deal, all those indicators could very quickly turn sour in the months to come. Markets are not always rational, but they do tend to anticipate events. Right now the message is that they won't be mollified by anything short of a credible budget solution.
- Things are much calmer on the bond side of things. Meanwhile, things are much calmer in the bond market. Yields on U.S. government bonds have drifted slightly lower during November, which means prices are up a bit. The bond market, you see, has less to fear from the fiscal cliff. Deficit-reducing measures, however drastic, would improve the reliability of government bonds. If the economy is brought to a standstill, it would probably choke off inflation, which is also good for bonds. What message can consumers take from this? Well, the bond market is signalling that going over the fiscal cliff would probably mean rates on savings accounts and money market accounts would remain near zero. Mortgage rates could actually move a little lower, though current mortgage rates are probably close to as low as they can go. The rub for potential mortgage customers would be that a weakened economy would likely mean very tight lending standards.
There are times when the stock market can just seem contrary -- good news is treated as bad news or vice versa. This is generally because of expectations, meaning the market has either over-anticipated an announcement or is hoping conditions will prompt a reaction from a government agency, such as the Fed.
With regard to the fiscal cliff, though, the market seems to be playing it straight. It's not that it is acting contrary toward other economic news -- it is just ignoring it. The question is, can Washington ignore a distressed stock market?
Posted in: Savings Accounts
November 26, 2012
Watching the legislative process in Washington can be as unappealing as watching sausages being made. But it helps if you know what to watch and what not to watch.
When it comes to legislation to avoid the fiscal cliff, there is certainly no shortage of people watching. Earlier this week, Ben Bernanke joined the chorus of economists urging the government to find a timely solution to the problem. This is consistent with comments Bernanke has made previously, which indicate that he knows all too well that whatever power the Fed has to affect the economy via monetary policy will be overwhelmed at this point by decisions about fiscal policy.
The key details
So far, the fiscal cliff standoff has been surprisingly short on new rhetoric, let alone action. Think of this as the opening moments of a boxing match, when the fighters circle each other looking for an opening. As you wait for developments to begin, here is a quick guide to watching the fiscal cliff negotiations:
- Don't read the rumors. The politicians involved are well aware that this is a spectator sport. They will make statements designed to influence public opinion, and leak information to make themselves look good. Just remember that until a deal is done, any public statements or rumors are just smoke and mirrors.
- Think of the financial markets as a hammer. The stock market has had some crazy days lately as it tries to anticipate the outcome of the fiscal cliff negotiations: down more than 300 points on November 7, down 185 points on November 14, then up more than 200 points on November 19. This kind of erratic behavior can be hard to watch -- especially the losses. It helps to remember that the financial markets act as a kind of hammer in these situations -- they pound home the message that there will be financial consequences to Washington's actions. This hammer is one of the few things politicians on both sides of the aisle pay attention to.
- Don't forget about the rest of the world. Important as the fiscal cliff is, there is an outbreak of hostilities in the Middle East, and continuing developments in the European financial crisis. In today's world, no event takes place in isolation.
- Realize that the deadline may not be such a deadline. January 1, 2013 is widely reported as the deadline for a solution, because that's when a package of tax increases and budget cuts would take effect if there is no further action. The truth is, that's not such a hard deadline. Tax breaks passed during the year can be made retroactive to the start of the year, and budget cuts phase in over an extended period of time. It turns out the fiscal cliff is more of a long downhill slope.
Through it all, just remember that it doesn't ultimately matter how ugly it is to watch the sausage being made. What matters is whether the end product is any good.
Ultimately, the yield on your savings account next year may reflect the tale of the fiscal cliff and the government's approach to avoiding it. If rates fall still further, it may be a sign that things didn't go especially well.
Posted in: The economy, the Fed, and interest rates
November 15, 2012
Face it -- the fiscal cliff is the 800-pound gorilla in the room right now in terms of economic news. People are so afraid of it that it seems to have everyone's full attention.
But as important as these budget negotiations are, there are still other economic developments worthy of monitoring. Sometimes these even yield good news, as with the case of the recent trend in oil prices.
Oil prices and inflation
Oil prices are like a person with a bad reputation -- nobody talks about them much when they are behaving, but when they flare up they become one of the top economic concerns.
Oil prices have made headlines in a negative way twice this year. They surged above $100 a barrel in the early weeks of 2012, sparking fears of the type of sustained run in oil prices that helped slow the economy in 2008. Then, after subsiding from those high levels, oil prices jumped by about 20 percent in just eight weeks this summer.
That summer spurt in oil prices sparked a resurgence of inflation in August and September. Oil prices play an especially important role in inflation. Not only are oil and gasoline important components of the Consumer Price Index themselves, but because so many other aspects of the economy depend on oil and gas for their manufacture and transportation, any sustained rise in fuel costs can soon spill over into other goods and services.
For now though, the inflation threat from oil prices seems to have subsided. The past several weeks have seen oil prices ease from the high $90s to the mid $80s. For all the ups and downs oil prices have had this year, by early November they were about $10 a barrel below where they started 2012. That's the type of trend in oil prices that is very conducive to low inflation.
The effect on savings accounts
A low-inflation environment is vital to savings accounts, because they have so little breathing room. Average savings account rates are near zero, but rates can be found that are closer to 1 percent. If inflation stays flat, deposits in those accounts can make a little money. However, if inflation flares up even a little, the purchasing power of savings accounts starts to decline.
Add all this up, and you can see why people with savings accounts and other deposits might want to keep a wary eye on oil prices. A flat-to-negative price trend for oil is critical to those accounts staying ahead of inflation.
Waiting for the cliff
Of course, what depositors really want is for bank rates to rise. In large measure, that comes back to the fiscal cliff. A constructive solution to that problem may well be the best chance for generating the type of sustainable growth that could lead to higher rates in 2013.
Posted in: Savings Accounts
November 9, 2012
Election Day 2012 delivered three major outcomes:
1. Barack Obama won another term as president.
2. Republicans retained control of the House of Representatives.
3. The Democratic/Independent coalition retained control of the Senate.
In other words, voters signed up for the same general conditions they had before the election. So why might things be any different for Americans' finances over the next four years?
Reasons change may be near
It seems doubtful that votes to keep the White House and Congress in the same hands were resounding endorsements of the status quo. Americans face pressing economic problems, including persistently high unemployment and a looming deficit crisis. But here are four reasons why the years ahead may be different:
- The uncertainty is resolved. Business managers hate uncertainty. Forget any myths about whether Republicans or Democrats are inherently better for business conditions. Since the end of World War II, the economy has performed nearly identically under Republican and Democratic administrations. Annual inflation-adjusted GDP has averaged 2.9 percent under Republicans, and 3.0 percent under Democrats. The bottom line is that smart businesses will adjust to whatever rules are in place -- they just want to know what the rules are going to be.
- Obama can't run again. Right from Obama's inauguration, a goal of Republican Congressional strategy was to try to make him a one-term President by minimizing the number of legislative victories he could claim. By nature, that's a negative, obstructionist approach. Now that Obama has won a second term, there will be no incumbent running in 2016. That means that would-be candidates on both sides of the aisle will want to start burnishing their track records, and that means having some accomplishments to show.
- Recognition is growing that gridlock is not a winning formula. For a long time, there was a notion among fiscal conservatives that gridlock in Washington was actually a good thing, because it prevented new spending measures from being passed. However, the huge expansion in the federal budget due to two wars and the fiscal crisis changed the game. The current course of spending means that active steps need to be taken to rein in the budget.
- A narrow anti-tax platform won narrow support. The Obama campaign was successful in eroding Mitt Romney's perceived advantage on economic issues by defining the key fiscal difference between the two candidates as the willingness to tax earners above $250,000 in order to address the deficit. This was a numbers game that Obama was bound to win. Right or wrong, Romney's defense of the wallets of the wealthiest Americans wasn't going to win him many votes.
Whether things are really different will be easy to tell: If America sails off the fiscal cliff at the end of this year, or otherwise fails to put in place many widely agreed-upon measures to responsibly address the deficit, it will be a sign that it's back to business as usual in Washington.
But if not, it could be a sign that the economy is starting down a new path. If that path leads to better yields on savings accounts and improved banking conditions before 2016, it will be a victory for the president and consumers alike.
Posted in: Personal Finance