The Smart Way to Play the Old Waiting Game
If you had the choice of earning 5.25% on your money or 4.50%, which would you take? Granted, neither rate is exactly thrilling, but 4.50% seems downright insulting. You’d probably go for 5.25%, right?
Amazingly enough, many bank and S&L; customers today are choosing 4.50% over 5.25% by keeping their cash in either passbook accounts or money market accounts, instead of opting for longer-term certificates of deposit.
It’s a silly choice, and it’s most likely going to come back to haunt a lot of savers in 1992--because short-term interest rates seem to have nowhere to go but down as the economy weakens further.
Savers who make this choice believe that they’re doing the logical thing. They’ve watched interest rates fall for the past 18 months, and now they’re sure that rates will begin rising again sometime in 1992.
So these savers refuse to lock up their funds even for one year. As older CDs mature, much of the money is being dumped into plain old passbook accounts or generic money market accounts that generally pay 4.5% or less. Savers are content to play the waiting game.
The shift of funds has become so pronounced, in fact, that the amount in short-term accounts nationwide may soon surpass the total in small CDs (accounts under $100,000)--which would have been unthinkable even a few years ago:
* The sum in small CDs, mostly six-month and one-year accounts, has plunged from $1.14 trillion to $1.06 trillion since last May, a drop of $78 billion.
* Meanwhile, the combined total in bank and S&L; money market accounts and passbook accounts has surged to $1.03 trillion from $969 billion last May, a gain of $59 billion.
Of course, some of the money that has fled CDs this year has gone in search of higher returns in the stock market and in Treasury, corporate and municipal bonds.
Yet, as the numbers show, many savers in banks and S&Ls; are conservative types who will never give up the 100% safety of federal deposit insurance. They stay put.
That’s fine. But if you’re going to keep your money in a bank or S&L;, you owe it to yourself to get the best possible return. And right now, the best return is in one-year to two-year CDs, which generally pay 5% to 6%.
Look at it logically:
* The economy appears to be falling into a new recession, as layoffs keep rising and consumer spending remains weak. The Federal Reserve Board, under intense pressure to help ease the pain, is poised to push interest rates lower once again--as it has done for nearly 18 months.
* If the Fed acts as decisively as some economists expect, it will soon cut its key “discount” rate from the current 4.5% to 4%. That would be the lowest for that rate since 1967. Another Fed rate cut would pull other short-term rates, such as on bank passbooks, down further.
* Most important, many experts insist that there is almost no chance that interest rates could begin rising again until late 1992 at the earliest--even if the economy begins to rebound next year.
Why should rates stay down for a long time? Look around at your neighbors or your own family. How many of them are eager to borrow money? Chances are, none of them wants to take on new debt. The simple fact is that the nation as a whole--government, corporations and individuals--is too deep in debt as is, after the spending binge of the 1980s.
Interest rates are just the cost of money. If there’s less demand for money, the cost will fall. That’s how Lacy Hunt, chief economist for HongkongBank in New York, sees the interest-rate environment of the early-1990s.
Hunt calculates that the nation’s total debt (public and private) now is 240% of our gross national product. As recently as 1980, total debt was just 175% of GNP. The last time debt was as high relative to GNP as it is today was during the Depression of the 1930s.
“If we’re as over-leveraged as I think we are,” Hunt says, “I see several years of very low interest rates” as consumers and businesses forsake borrowing to rebuild their finances. How low on rates? Hunt sees short-term bank accounts paying as little as 3% to 3.5% in 1992.
Edward Yardeni, economist at C. J. Lawrence Inc. in New York, agrees that short-term rates in the 3% range are coming soon. For savers who are playing the waiting game in passbook accounts, that will mean more heartache ahead, he says: “You may think you’re staying out of trouble by staying in safe (short-term) accounts, but it’s probably not a good idea.”
Say you’ve got $50,000 to save now. If you lock up a 5.25% one-year CD today, you’ll earn $2,625 in interest over the next year. If instead you stay in a 4.5% passbook and that rate stays the same for the next year, you’d earn $2,250 in interest.
The interest advantage in the one-year CD thus is $375, which is no small potatoes for many savers who depend on interest income to live. And the advantage of the one-year CD could become a lot bigger if passbook rates continue to fall in 1992 to 3% or less, as expected.
So what if the experts are wrong, and interest rates begin to rise late in 1992? Big deal. Your CD matures next December; you’ll be ready to reinvest at a higher rate.
And if rates are still dropping by next December, you will at least have earned a better return in 1992 than if you had played the waiting game in passbook accounts--only to find that you waited for higher rates that never came.
Briefly: Pasadena-based Tetra Tech Inc. proved on Tuesday that there’s still decent demand for new stock issues, even in a weak market. The formerly private engineering firm sold 1.4 million shares to the public at $10.50 each. The stock then rose to close at $11.25 on the NASDAQ market.
Tetra provides engineering and consulting services that address ground-water pollution--a growing problem for much of the nation. The firm’s revenue jumped 35% in the year ended Sept. 29, to $51.5 million. Earnings for the year rose fourfold to $2.34 million, or 60 cents a share. The independent New Issues newsletter in Ft. Lauderdale, Fla., says Tetra is “front and center in a growth business,” though the newsletter advises waiting for the stock to fall under $9 before buying. Tetra’s stock symbol: WATR.
