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The 0.00% Yield (avc.com)
58 points by tbgvi on Mar 13, 2010 | hide | past | favorite | 38 comments

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.

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.

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!

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).

If you had a house, and a mortgage, you could put money into the principal. Mine is 5.675%. What investment is going to guarantee me that return?

I just got done talking for an hour on my show about crap like this, so I'm in the right frame of mind to discuss this.

Munis are working right now because people with deeper pockets (pensions, institutions) are forced to allocate capital here. Essentially, cash is not an option. The risk for Munis on the short term is pretty fair, and we're probably not going to see a crash in the asset right now solely for the fact that it's so blindingly obvious.

Define "cash." Holding onto the dollar may not make sense in this interest rate environment because our printing presses are the fastest on the planet. Gold sucks when the yield curve is this steep. You could try a carry trade and pick up some AUD or NZD... follow the ticker DBV to see how that's doing.

Also, you could try LT government bonds-- the feds have had a crapton of auctions, and with the deficit is going they have an interest in keeping 30year rates low. The joe-retail trader way to play this is TLT, which is looking technically healthy.

But with all this financial rambling, this is Hacker News. I absolutely agree with you-- the best asset you have right now is your business, so I would claim diversification is stupid, don't focus on the market because you can get much higher returns doing something that doesn't require yield curves. Odds are, you don't have enough cash to worry about munis.

Munis depend on the insurer. I'd feel very comfortable with Berkshire insured munis.

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!

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...

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!

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.

Mish had some interesting comments on Gov. Christie's recent actions. http://globaleconomicanalysis.blogspot.com/2010/03/governor-... It looks like he's one of the few politicians with the courage to actually face reality.

And the current zero interest rate policy only helps consumers with adjustable-rate debt. It actually hurts those with fixed-rate debt.

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.

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.

Watch out for these UltraShort ETFs. They are only useful for day trading. Over periods longer than a day, they don't match the returns you'd expect to see for a variety of reasons. More info here:


I like this fund too, but to clarify, it moves double inverse to to US T-Bond Yields. For instance, if the ETF portfolio has an average duration of 15, a one percent increase in treasury bonds rates will cause a 30% increase in the ETF price. A nice hedge against higher rates.

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

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

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.

Paypal money market is paying 0.04%.

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.

>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.

My Vanguard money market is yielding 0.01%. Ouch.

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

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.)

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

Your Current Playable Balance is: 0.00 IDR

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.

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?

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.

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.

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.

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

I think your point here is that this particular blog doesn't do ethical (according to your set of ethics, from my perspective, zynga is at least attempting to clean up their revenue model) analysis of companies prior to making investment recommendations. Honestly, though, ethical investments funds are somewhat of a niche (and I don't think most of them would have a problem with zynga anyways) - whereas most would not invest in tobacco - which in years past has been a favorite holding for Warren Buffet; I don't suppose you are going to besmirch him, are you?

There's a big difference between exchanging money for a product that customers want (cigarettes) and taking money from people who don't know they are giving you money at all and who also receive nothing in exchange.

You can say it is ad hominem or you can say it is a matter of trust. I don't trust this man or what he says. He has shown himself not to be trustworthy and that is a serious issue of character -- not just some flaw in an argument to be disagreed with.

Look, humans can rationalize anything, so the rationality of the argument is less important than the motivations of the person making the arguments. Why are they saying what they are saying? At some point, you have to trust people and when someone justifies ripping off other people in the name of making a successful startup, then every argument after that becomes suspect.

He has done just that. Said it is okay to build a business based on ripping people off -- it's not.

I have gotten the opposite vibe, that Fred has proven himself as someone I can trust. What makes you think otherwise (I've been reading his blog for a little over a year, and he's remained consistent).

Before zynga was "outted" he lauded them as his best investment. After techcrunch wrote what they did about zynga's business model, he said nothing for a very long time, until one day he was like, "Zynga is a great company, they are awesome and what they are doing is fine as long as they are making money."

Well, it's not fine in my opinion and he should have said it wasn't fine and they should have given back all the money they took from customers. Instead, he's excited about making more money by selling zynga to the public or some other member of the startup pyramid scheme.

fnid2 - you don't have your facts straight on Zynga

read this post and see what really happened.


calling me corrupt is strong language and inaccurate

i have a reputation for being honest, respectful, and generous. i have worked for 25 years to build that reputation. i value it more than anything other than my wife and children.

it is very hurtful to me to read hateful stuff like you spew out

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