
The 0.00% Yield - tbgvi
http://www.avc.com/a_vc/2010/03/the-000-yield.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+AVc+%28A+VC%29
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jswinghammer
I don't think investing in municipal bonds is a very good idea right now. If
you look at the problems of pensions around the country counties and cities
are going to declare bankruptcy unless unions back off their demands which
they probably won't. All around the country politicians are putting their
heads in the sand hoping that these problems will just blow over and hope for
another housing boom.

Right now holding onto cash is probably the best bet. I'd expect deflationary
pressures to continue despite the federal reserve's inflation. They haven't
started dumping money out of planes yet but they will if the default rate
starts to climb much more.

The rating companies who assign those AA and AAA are useless as well. Recently
Moody's Investors Service threatened to lower Iceland's debt rating to junk.
Why isn't it there already? It's absurd.

Right now I prefer to invest my money in business opportunities and hold onto
as much as cash as I can. It seems like risk out there is extreme when
interest rates are 0%. How can you judge what's actually going on in the
economy when the price of money is so distorted? We're facing a serious
shortage of capital right now and the notion that a 0% interest rate is the
way to raise more is insane.

Anyway if these municipal bonds explode on you I don't think anyone is going
to bail you out.

~~~
lionhearted
It's not sexy, but if you have the space for it, picking up a long term supply
of necessities isn't a bad place to put your money. Various sales and
firesales happen, picking up canned goods, toiletries, and so on is a decent
hedge against inflation and the bulk savings from buying a year's worth is
probably going to exceed anything you'd get on the market. Of course, this is
more for people with low tens of thousands of cash around, not quite as
applicable to people with hundreds of thousands and higher in cash trying to
figure out what to do with it.

But if I had a house, I'd go pick up a year's supply of the basics whenever I
saw them come moderately to deeply on sale. It's going to save more money than
you'd make on any bond in the near future.

~~~
encoderer
For this to be true, you'd have to imagine the investment as at least 1 year,
wouldn't you agree? So probably several years? And you'd have to purchase
goods that would last that long.

The reason I say that, is that you can still find 3% FDIC insured savings and
money market accounts (look at your local Credit Unions). For me to get a
better return on canned pears and chicken stock, we'd need real consumer price
inflation > 3%. If you take a look at the consumer price index and remove
energy costs, it's been quite some time since we've experienced 3% annual
inflation. (Removing energy costs is the key here).

Now.. if you hold it for 3 years, it would probably be a no brainer. As long
as you don't mind actually eating what you bought over those years -- eg no 40
cases of Peanut Butter!

~~~
pupeno
I think the issue is not only inflation, but the price fluctuations that
happen all the time, that are much bigger. If one day, at the supermarket, you
see toilet paper in a two for one offer, and you buy a whole year of supply,
you'll be saving 50% over the year. I think the goal is not playing against
inflation but to play against the stock issues of supermarkets (if you have a
way to have the stock locally).

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bokonist
_That's why this "hyper low" rate environment is dangerous. Because it won't
last and when rates start to go up, the market will stall or even decline._

Excellent point. Of course, the government knows this, and will thus be
terrified to raise rates for a long time to come. Any raising of rates will
quickly cut short the recovery, and then the government will panic and lower
them again. Welcome to Japan!

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Jim72
Here in NJ, the Governor is swinging blindly with an axe. If much of his cuts
get passed, there is a real possibility some local munis will actually go
bankrupt... along with their bonds. While this is speculation right now, it
does seem that either counties are going to go broke or the State is.

There was also a story not too long ago about foreign investors forgoing the
usually favorable T-bills because there were considered too risky. I am not
quite sure what that really means. Here it is at WSJ:
[http://online.wsj.com/article/SB3000142405274870480420457506...](http://online.wsj.com/article/SB30001424052748704804204575069172269719754.html)

Now, about this 0.00%. I firmly believe that we are in a time vacuum, by
design. You see, consumers form the foundation of our economic system. They
are the engine. By keeping interest rates across the board obscenely low, we
are providing much needed time for them to pay off debts. Once the bulk of the
consumers become stable, then the rates should rise. Until then, the front of
the caterpillar has to wait for the back to catch up!

~~~
CWuestefeld
_If much of his cuts get passed, there is a real possibility some local munis
will actually go bankrupt._

Yes, and I hope that happens. Just like the fed bailout of banks and of GM
were wrong, we need to let bad institutions die. How else can society learn
what works and what doesn't?

 _By keeping interest rates across the board obscenely low, we are providing
much needed time for them to pay off debts._

Interesting thought, I hadn't considered it that way. The question is whether
it's worth the cost.

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megaduck
We've been here before.

After the implosion of the Japanese asset bubble in the early 1990s, Japan set
effectively 0% interest rates in an effort to stimulate the economy. This led
to what's known as a 'carry trade', where investors would borrow free money
from Japan, and then invest it in higher-yield investments abroad.

After the collapse of the American equity markets in 2001, higher yields were
hard to come by. So, all that liquidity went looking for a new home and
largely landed in mortgage-backed securities, credit default swaps, and their
associated derivatives. Of course, a lot of these investments yielded only a
few percent, so investment funds would often leverage up 20x-30x to get a
respectable rate of return.

When those investments started to unwind, they unwound _hard_. The end result
was that the Japanese carry trade contributed to the eventual devastation of
the American financial system. Which, ironically, means that we now have 0%
interest rates. The great cycle continues.

Now, the Japanese carry trade certainly isn't the whole story, and there's a
lot of other factors that were in play. However, there's no doubt in my mind
that the BOJ's 0% interest rates helped us dig the hole that we find ourselves
in today.

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jonbischke
ProShares UltraShort 20+ Year (TBT) is an ETF that moves inversely with US
Treasury bond prices. In other words, if interest rates rise then you make
money. I think it's getting harder (although not impossible) to envision a
future in which we won't have substantially higher interest rates. Might be a
worthy add to portfolios if you're concerned about this.

BTW, watched I.O.U.S.A. this week (<http://www.iousathemovie.com/>). If you
want to have the crap scared out of you about the impending issues with the
debt that's the movie to watch.

~~~
messel
I do prefer reading about this stuff and watching movies like the above over
horror flics. :D

~~~
jonbischke
Some might argue that the documentary above is a horror movie.

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joelhaus
The article left a lot unsaid (granted, readability would've been sacrificed
to cover everything sufficiently). Here are some thoughts on a few of those
missing things...

In real terms, the investments quoted actually had a _negative return_ during
2009 (nominal interest rates mean little outside of an apples-to-apples
comparison). With the unadjusted CPI rising 2.7%, those dollars can now buy
less than they could one year ago.

The negative return actually suggests a lot about the economy (see Japan's
lost decade -- <http://en.wikipedia.org/wiki/Lost_Decade_%28Japan%29>). Here
are a few of the conclusions one might draw:

\- There is considerable fear remaining among investors.

\- The government is encouraging risk taking and investment, while
discouraging savings.

\- US treasuries represent the risk-free rate in many traditional financial
models; the traditional models are either changing _OR_ returns that seem sub-
optimal when compared with yields from 3 years ago actually have significant
amounts of risk embedded in them.

\- Banks & local governments can borrow at very low rates, thereby
strengthening their balance sheets, making for a potentially attractive
investment opportunity (this is, of course, dependent on how wisely you expect
them to allocate the capital they borrow).

\- The implications are far reaching. This is only the tip of the iceberg.

Take away: Look for inefficiencies and exploit them.

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rms
Paypal money market is paying 0.04%.

~~~
encoderer
Local credit unions here are all offering 3% checking accounts on balances up
to, usually, 25k to 50k. It means your cash is spread out but that's not
really a bad thing.

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pbhjpbhj
> _Regardless of whether or not my bank or any bank is taking advantage of its
> customers (and I am not sure they are), this zero interest rate environment
> is worth thinking about._

Is the bank paying large bonuses (UK banks are paying bonuses bigger than
their profits) if so they can afford to pay their creditors for giving them
money to use.

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100k
My Vanguard money market is yielding 0.01%. Ouch.

~~~
ahk
FYI, a HSBC Advance savings account gets you 1.1% at the moment

~~~
pfedor
And, since it's FDIC insured, it's as safe as treasuries as long as you keep
below $100k in the account (or was it $250k? I don't remember.)

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iddndewa0276
Your Current Account Balance is: 0.00 IDR (Real Credits)

Your Current Playable Balance is: 0.00 IDR

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fnid2
I don't even waste my time reading this guy's blog anymore. He's illustrated
to me that he is corrupt and supports revenue models that are fraudulent
ripoffs of his startups' customers.

As hackers who want to create a better web, we should stop promoting the words
of people like him and jc and others who give the internet a bad name. We
should just banish them from the web -- they make it worse for everyone but
themselves and their uber-elite little group of scammers.

~~~
mixmax
He's got some money, and he wants to safely invest them without too much risk
so he buys bonds. Then he states his opinion on the risk of the historically
low rates we're experiencing right now.

How exactly is that corrupt and supports revenue models that are fraudulent
ripoffs of his startups' customers?

~~~
fnid2
It's favorite investment, Zynga, is a notorious ripoff artist and he has
supported them before and after it was made apparent that their revenue model
was a scam.

~~~
messel
They had a small fraction of revenue from a questionable source (scammy sign
ups). It was corrected immediately, Mark Pincus is an interesting guy, but I
don't think of him as a scam artist. I think of him as a founder who wants to
control the destiny of his company through revenue.

~~~
fnid2
I suppose my definition of "corrected" is different from yours. My definition
of corrected means making the people you have wronged whole again. They took
money from people and kept it and would have continued taking money from
people in the same manner if Techcrunch hadn't have been so vocal about the
zynga scam.

There's a video floating around of Mark Pincus telling a group of startups
that it's okay to rip off people as long as you're making money.

It's atrocious behavior and I don't believe anything about it is at all
acceptable. Until the situation really _is_ corrected, this dude will have no
respect from me.

~~~
messel
There's plenty more information out there about Mr. Pincus. He's not the
monster he was made out to be.

