What to do with Cash?

If there is a recurring theme that I am hearing from my clients, it is this: what do I do with short-term cash? Many have found that their money market account, savings accounts and CDs are paying little or no interest. (If you haven’t looked lately, you might be surprised to see rates on CDs at less than 0.50%). If you invest these funds in some type of long-term investment, you might be facing the prospect of inflation eroding the interest paid and the principal declining in value. The real question, therefore, is “where do I put money that I want to have liquid but get a fair interest rate without taking undue risk?” As investments go, the shorter the term of an investment--from the time you invest until you get your principal back--the lower the risk, if you buy quality! On the other hand, the shorter the term of the investment, in general, the less the interest rate your principal will earn. What I have found this year is that short-term taxable investments are paying little or no interest. This is in large measure because the Federal Reserve (Fed) target for short-term interest rates has been 0%. The Fed gets what it wants! But the Fed does not care about nor does it control the short-term interest on tax-exempt investments. What we have seen so far this year is that a good place to invest for liquidity, quality and a fair interest rate has been short-duration municipal bonds. If this sounds like something you might want to consider, give us a call and we can discuss it. Ed Mallon

Who will Bear the Cost?

It seems to me that much of the news in September has been "Bad News". It was reported last week, for example, that the U.S. Deficit for the year hit an all time record, well over $1.25 trillion dollars. Last week the dollar hit a new low. Many investors have been looking outside the United States to obtain better rates of return as the Federal Reserve has been targeting a key lending rate of 0% to keep interest rates very low. Earlier in the month it was also reported that the unemployment rate has hit 9.7%. We now have about 14.9 million individuals out of work, according to Christopher S. Rugaber in his September 4th Associated Press article. This does not include those who have taken reduced salaries or lower paying jobs and those who must take furloughs. For some of these individuals, who will bear the cost? For some of these individuals, the unemployment checks are about to end, leaving them in desperate situations. We are also hearing that the "rebound" of the economy may be a "jobless rebound". With all of these reports, it is no wonder that consumers who have jobs have cut back their spending, are saving more and are worried. We have to be thankful for the clunker and new homeowner's programs, as brief as they may be, in motivating consumers to spend. All of the above made me wonder how the Federal Debt will be repaid? It can't be repaid by those who are out of work. We are finding, on an international level, we are losing manufacturing jobs and not getting the new high tech manufacturing jobs because our corporate tax rates are too high (see Business Week Sept 21, 2009, "Can the Future Be Built in America?"). It therefore seems unlikely that increasing corporate taxes is the answer. The answer is that individuals will have to carry the burden of added taxes. For years, we have heard about the widening gap in earnings at the top end. Certainly this top group of earners is the group to go after. One of the problems with this is that the top earners are seeing their incomes declining. According to an article on page 1 of the September 10th issue of the Wall Street Journal, "Income Gap Shrinks in Slump at the Expense of the Wealthy", while the top 1% of tax returns in 2007 accounted for 23.5% of all personal income, it appears this will be reduced to about 15% in 2010. This top 1% of tax returns paid 40.42% of all the taxes collected in 2007 according to The Tax Foundation. To be in this rarified 1%, you had to have had an adjusted gross income of $410,096. The top 5% of tax return filers are also seeing their incomes declining, and in 2007 paid 60.63% of all Federal taxes. These were filers with $160,041 of adjusted earnings. If this group is seeing their earnings coming down, then the taxes collected from them will also come down. A combination of less government spending, higher income taxes and more jobs is likely to be in our future. The good news with all of the above is that there is an awareness of what is happening and a real opportunity to set Federal policy to go after the high tech manufacturing jobs, develop new jobs relating to the environment and move away from high reliance on the financial services sector in creating jobs. The United States has responded in the past and I am sure will do so again. Ed