0.01% and Reality

Bill Gross (PIMCO) is musing about how bad it is to earn 0.01% on his Money Market accounts and suggests placing his riskless money into Utilities…

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Dec+Gross+Anything+but+01.htm

He talks about how the designs of the Fed are to keep Interest Rates so low that they force you to move your money into risky assets.

“The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.”

I think the key issue will be when your Purchasing Power is getting ravaged by Inflation, then you will have to do something to protect yourself. But, with Inflation at effectively Zero, there isn’t much cost to staying in Cash, if your overall goal is to keep your money SAFE.

One Month US Treasury Bill yields actually went negative last week and the Three Month Yields were even worse. So are people really buying US Treasuries, even as the Fed tries to force people to put their money into riskier assets?

You bet they are. FDIC Insured balances (Money Market Funds) actually increased about $400 billion last month.


Why? Because they don’t trust the number reported by the Government and Wall Street. They want to know that they still have money and will worry about Inflation after they actually see it.

Morgan Stanley is telling you that the Yield on the 10-Year US Treasury will pop 2.20% higher next year. I am guessing that there is not a chance in **** that Rates will rise that far, because if they do, then housing prices collapse again. If TBT breaks out, then I will change my opinions and change my allocations…

http://www.creditwritedowns.com/2009/11/morgan-stanley-expects-10-year-yields-to-rise-220-bps-in-2010.html

This weekend, two Fed officials talked about extending the Fed’s programs to buy mortgages beyond their current expiration date of March 2010. This is their vehicle for capping Interest Rates. Do you think they want Rates to go higher or lower?

If rates will be capped, then there are a lot of investors who would rather buy guaranteed safety and forgo the extra percent or two they could get by taking what may be substantial risk.

Money printing to keep Interest Rates down = good fundamentals for Gold…