Ben: There are facts that show there is going to be a continuance of saving in bank savings accounts.
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I have been working in the banking industry. Approx 40% of the new savings $$$ in Canada are coming into traditional savings instruments GICs, demand savings. As Bobby Yellin has stated, many rely on fixed income to tide them over regardless of the vagaries of the equities markets. Read yesterday I think, that the US savings rate is up. This makes sense as the equity markets are becoming more unstable, particularly with the Asian situation. I am seeing many people go long on their GIC's (5 years). This isn't what I would prescribe for myself, however, there is a mild deflation scare coursing through the markets. How mild is this deflation scare?? anyone's guess.
An interesting anomoly is occurring in GIC's. In the eighties when rates rose 1/2 or 1% longer GIC's would dry up for 3 to 6 months. Canada has had 3 interest rate increases in the past4 months and another of 1/2% today. The 3 previous were 1/2, 1/4 and 1/2 and these did not phase the people putting $ in long (2 to 5 years). Very unusual IMO. One can negotiate on open terms, monthly interest on some rather short maturities, ING bank is paying 4% on daily interest accounts whereas the Canadian Chartered banks are paying .25 to .35%. If you have $25k or more, you can idle funds at Prime minus 2% which in Canada is now 4.5%. Not sure if States banks will float demand savings but if they will for the same spread as Canada it would be pretty nice to float at 6.5%! Many are also waiting for the market correction and will have cash to make the leap at the right time. I know of at least 3 stock brokers who have moved their clients to mainly cash in preparation for a buying opportunity in these unstable times for equities. The Asian equity experience is also a negative for those in Asian Mutuals.
As for bonds. This is the time for all of the "little" people to exit bonds if interest rates are expected to rise. Will rates rise in the US? depends a lot on the unemployment statistic. We know that cheap goods are coming into the States if the $US stays up vis a vis other currencies. My bet on bonds is to stay out until we see which way rates are going, can't stand the capital depreciation when rates rise. You are right IMO that an argument can be made to stay in bonds for fixed income needs, however, rates are the determanant.
Just some ramblings, but, with some reality for a base,
Best regards,
Ron E |
