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Tuesday, September 28, 2010

Ramblings On Finances

Maybe it's because of my past background as a banker, but I pay a lot of attention to most things financial.  I find that I really have to dig to find stuff.  Whether it's the reporters not knowing the subject well enough, or they're simply providing cover for the administration because the news is not good, it's tough to find a decent article outside of the financial press.

I saw this article in the Wall Street Journal.  It is so very important for "unwashed the masses"  (that's you and me!) to know, but no one in the MSM talks about this stuff.
The largest number of bank failures in nearly 20 years has eliminated jobs, accelerated a drought in lending and left the industry's survivors with more power to squeeze customers.

Some 279 banks have collapsed since Sept. 25, 2008, when Washington Mutual Inc. became the biggest bank failure on record. That dwarfed the 1984 demise of Continental Illinois, which had only one-seventh of WaMu's assets. The failures of the past two years shattered the pace of the prior six-year period, when only three dozen banks died.
In just over 2 years, nearly 300 banks have gone teats up.

Our banking system is going through a massive consolidation.  Massive.  The article goes on to discuss how they expect there to be around 5,000 banks in the US in the next couple years.  That is down from the 8,000 or so we have now.

To put this into perspective, in the early 1980's, there were over 15,000 banks.

This consolidation is primarily due to mergers, not failures.  After the interstate banking laws were eliminated in the 80's, the rush was on to buy banks to increase your market share.  I worked for 3 different banks in the 90's and early 2000's that all got bought-out.

But that's not what's going on right now.  These banks are shutting down, and the FDIC is selling their assets for pennies on the dollar.  Why merge at market prices when the government will give you discounted assets?

Such a deal.  And expect a lot more of it.

No matter how the administration and the banks sell this, it cannot be good for the average American.  More control in fewer hands rarely ends well.

As part of one of the "Financial Reform" bills, there was a consumer protection clause that was aimed directly at small non-traditional lenders (I don't know if this clause was eventually included in the bill that passed - but I'd bet a big stack of money that if not, it will be in the future).  What this clause said was ANY lending had interest rate ceilings and compliance requirements, regardless of what the money was used for.  Supposedly, it even covered personal loans between private individuals.

For instance, if you want to borrow some short-term money and have no collateral, you should expect to pay a very high rate.  The lender is being paid for the risk they're taking.

With this bill, a private or small lender will be required to meet all of the compliance and interest rate limits, just like a big, multi-national bank.

Your first reaction might be, "Great.  Those scummy private lenders are just taking advantage of someone in bad financial times!"

In reality, what will happen is the little lenders will go out of business because they can't make a profit.  The big banks won't make that loan because it's too risky and they can't make a buck either.

You still need the money, so where do you go?  To the guy with the bent nose in the alley.  Their overhead costs are low, but their collection department is, uhm, unorthodox.

Bottom line:  Once again, when government intercedes in the free market and rushes in to protect the consumer, the consumer generally gets the short end of the stick.

It's good to be protected, huh?

Have you seen gold and silver?  OMG.

As of this second  (11:40am PST) it is at $1,307.60, up $13 per ounce.  Silver is at $21.72, up 26 cents.  If you look at the reason for the gold increase (top of the page) the $13 increase is $7.60 due to the dollar weakening, and up $5.40 because buying is pushing the price up.

Dollar tanking, people fleeing to PMs.  Well there's a shock.

Accept The Challenge

Why anyone has any kind of savings account sitting in a bank is beyond me.  Unless you have no other place to keep your money - a home safe, a can in the backyard - you are losing money every single day.

Interest rates are abhorrent - a great rate is 1% and they want you to tie your money up for 12 months.   Really, the only benefit is that they're holding on to your money for you.  My mom, for instance, feels good with that, so I don't give her (too much) grief.  But for every month your money sits in that CD, you're losing purchasing power.

PM's clearly have a market risk component that is usually not present with a CD or savings account.  There is no denying that.  This is a very personal choice that requires research and commitment on your part.  But at least right now - and I believe for the foreseeable future - money sitting in a bank digs you a financial hole.

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Copyright 2010 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Joseph said...

"Your first reaction might be, 'Great. Those scummy private lenders are just taking advantage of someone in bad financial times!'"
We were in town recently and stopped by a payday loan business and asked them to explain to our teenagers what their rates were. When we got to the car I asked the teens what they thought. At first they were incredulous and could not believe what they were charging their customers. After they were done I explained their disgust was understandable but it was not appropriate. The business is offering a service to the individuals who needed it and if people understand what they're signing up for more power to them?

"Why anyone has any kind of savings account sitting in a bank is beyond me. Unless you have no other place to keep your money - a home safe, a can in the backyard - you are losing money every single day."
Maybe you meant this to come across differently than I interpreted it but what is the difference between keeping cash in a bank or in a home safe in relation to the value of the money? Setting aside the security portion of the equation the money is losing value either way correct?

Chief Instructor said...

Joseph, a few years back when I was in banking, our regulators were on a big push to help "the unbanked" - people without checking accounts.

There were two primary categories: those that didn't want an account and those that were banned from having an account (past bounced checks, fraud, etc.).

The first group was largely illegal aliens. Mexican workers who were paid by check, but went to a bar, market or check cashing joint to cash the check. Some money would be sent back home, and the rest was kept in their pockets to live off of.

The problems were, they'd get mugged and all their money taken, plus they had to pay a hefty fee to cash the checks.

Cutting to the chase, when the pilot programs were run, the illegals still didn't want the accounts - only the folks that were banned because they were crooks.

I don't know how it all ended - if banks were forced to take these accounts. It was just a big, government program to make everyone feel good, but the result was totally negative.

Re: money in the bank. Sorry, I was trying to make the point of putting money into PMs instead of an essentially non-paying bank account.

I guess I was a bit too subtle ;-)

Joseph said...

Actually you were probably being abundantly clear to 99% of the population but I'm a colors and shapes kind of guy....speak slowly and with single syllable words and I can follow ;)

Outlander777 said...

I dont have money to buy PM's or stash coin or cash. I dont have a savings account. I pay bills buy food for now and the future. What i have cached will be barter if i dont need it.

Anonymous said...

Buying more silver...!

I do keep a savings account with a large balance b/c I want to be able to access it fast if needed. Currently getting 1.3%, no fees, no minimum, can pull it anytime;

Anonymous said...

I too have money in the bank. But be aware that when/if they declare a bank holiday becasue of an economic collapse it will happen to all banks at the same time with no warning. When it happens they may not open for a few days or a few weeks and when they do open there will be new rules. You may not be allowed to withdraw your money or perhaps allowed to only withdraw $300 a month.

Chief Instructor said...

Joseph, Naw, I was too subtle in what I was trying to get across. I'm a connect-the-dots guy so I can get it!

Outlander, I always stress that bills and preps MUST come first. PMs are a savings/retirement option. The basics first, then PMs.

Suburban, I personally have zero dollars in savings. A couple months of bills in a checking account, a couple of months in a PayPal account, 6 months of cash expenses (gas, food as opposed to bills - mortgage/rent, car, insurance) in cash, and everything else in PMs (coins, ingots and scrap gold).

Right now, I just don't see any utility in a bank savings account.

Anon, part of my strategy involves the possibility of a bank holiday. As has been discussed previously, it has happened in the past and the likelihood of it happening again is, IMO at the highest point in my lifetime.

I'm not saying it is highly probable, just that it is MORE likely now than in the past.

Since the bank aren't paying any kind of interest, the risk/reward equation just doesn't make sense to me.

Unknown said...

Multiple issues,

-Banks failing I am cool with. That herd needs to be culled for sure. However the culls aren't getting killed by wolves and eaten, they are just forming bigger herds with more culls. Given the issues of free market competitiveness and "too big to fail" this is bad.

-As for the small short term high interest loan (check cashing, payday loan) types. A great example of something that is legal but not moral. It is a scummy business that preys on people who are down on their luck. It gets them with misinformation (there is almost always a better option available) and marketing and keeps them with interest rates that make credit cards seem like a great deal. It is just legalized loansharking with a cheesy strip mall office and no big guy with the bent nose. Hell I would say it is even worse. At least with Tony Soprany you know exactly what you are getting. However at the end of the day I don't believe they should be outlawed, like Visa and B of A do, just that it is a pretty sleazy business.

As for keeping money in the bank. While tiny the 1.1-1.3% is more then it would earn under the mattress; though as you mentioned it is so negligible to almost not be worth consideration. More significantly I see two reasons to keep some money (other than normal operating funds for bills, etc) in the bank. The first is that there is an upwards limit on how much cash I am comfortable keeping lying around the house. Especially for those of us who for whatever reason can't currently have a huge safe or tear into the floor/ walls to make a cache a bunch of money on hand is at a decently risky proposition. For me at this time the amount of cash I am willing to keep physically on hand is significantly less then the amount that gives me a warm fuzzy feeling for an emergency fund.

The second is that money in the bank is accessible from pretty much anywhere given a card, checkbook or phone at least assuming normal commerce is going on (some cash is of course a good thing). This is particularly important if your lifestyle has more then occasional long distance travel. Lets say you drop a transmission a thousand miles from home or get stuck in an airport for more than a couple days. Neither scenario is too far fetched and if you travel enough something like that will happen. Twenty thousand bucks in mixed bills in the gun safe/ wall cache will not pay for a hotel room in Philadelphia or a new transmission in Sioux Falls.

-As for PM's. As a long term approach for holding liquid wealth it can work to go big into the shiny stuff. Assuming you buy over time (and thus don't make a huge buy when the market is high) and don't sell big at a time the market is in the tank PM costs would, on the whole, probably average out for you. I cannot however help but note that we don't live on a long enough time line for things to always average out. Kinda the same way that an 8 or whatever percent historical average for the stock market doesn't work out if you need to make a forced withdraw when your investments are in the can. Also at least the way my life works the time I needed to cash a good chunk of my large PM savings/ emergency fund would be the week metals were in the can.

As for making a big buy right/ shift now I am a lot less confident. I'm not convinced that the time when seriously shifting your liquid assets around then getting a couple rolls of Eagles or Maple Leafs wouldn't be a bad call isn't a year or two past. You never want to be the last person to jump onto a commodity up swing and really don't want to jump onto it late and big. I see shades of 79-80ish in the PM market, particularly gold. Maybe I am wrong and PM's will go high and stay there. Guess I will just have to watch and wait.

Anonymous said...

Another risk is thatthe government will combine a bank holiday with a change in the money. You will be required to bring in any cash you have and convert it to the new dollars. There will be limits placed on how much you can convert and questions for anyone with a lot of cash. You will have 5 weeks to do it and after that the old dollars will be toilet paper.

Anonymous said...

The money we keep in the 1.3% account is just under two years worth of living expenses at our current level, longer if we cut back on some things or move to a less expensive area (if not tied to jobs here). Note that the current U.S. inflation rate is 1.1%, so it's not losing anything, right now. As Ryan mentioned, I also don't feel comfortable keeping a lot at home - my limit there is ~$5k cash and a few hundred face value is silver. We rent right now, someday when we buy I'll be able to create secret, concrete/steel reinforced rooms, etc. and store more cash at home.

Another reason I want to maintain easy access to it is in the event my dad lost his job, I could pay off the small farm mortgage if needed (would be less than half my current cushion). Don't need it so much for problems that would come up in travel, have a credit card with high limit for that, and everything else (it's a card that gets airline mileage, so far we've gotten back almost $3k worth of travel, and don't carry a balance).

At any rate, I value fast access more than another percent I'd get in a CD. If bank "reform" involves reissuing dollars or a freeze on how much can be take out, hard to get out of that w/o having it in PMs (or a good safe), and, again, like Ryan, I'm not willing to dump that much into it, at least yet.

Chief Instructor said...

Ryan, Anon, Suburban:

Obviously, everyone's life is different. If, as Ryan mentioned, you do a good deal of long distance travel, you need more money in a bank account.

As I apologized to Joseph, I guess I was too subtle - it must have been with the whole post!

I believe in PMs instead of a savings/CD account - mid- to long-term savings. To leave money in those accounts, or to have more money than is needed for X period of time is costing you money.

Yes, it is easily accessible, but it has increasingly less purchasing power. By keeping money in a bank, you are losing money. The interest rate you are earning is less than inflation, and I believe inflation rates will be increasing even further, causing an even more rapid loss of purchasing power.

As I noted, a huge component is your personal risk tolerance. PMs are risky. We could absolutely be in an "asset bubble" right now. I don't think so, but it is possible.

Also, it is not in the best interest of the government to have people with money "out of the system". They have the wherewithal to mess with the markets, causing sudden drops or spikes. No doubt about it.

It takes a different mindset to see PMs as savings. My grandfather (a young adult in the Depression) would not use banks except for the bare minimums. He was into PMs before they were cool! My mom - his daughter - will not even consider owning a single gold coin. I have one brother with PMs, and another that would look at it very suspiciously.

To each their own...

suek said...

I guess I agree with you. Bought a small greenhouse at Harbor Freight yesterday. Originally $389, marked down to $279(plus tax, of course). Now I have to assemble it, furnish it (shelving of some sort) and learn how to make the best of it. First on the list is rooting new tomato plants from the summer ones that are on their last legs (due to white fly mostly, but also the season). We live in a climate that allows the 'maters to live on to next year, but come next year, don't produce worth diddly - I tried it. However, an old GardenWay tomato book recommends taking cuttings and rooting them as a way to get winter tomatoes. This is the year to try it. And also to start seeds...I haven't done well with that - they get to spindly and damp off.

Chief Instructor said...

Sue, I have a friend that has been doing clones for a bunch of plants. He takes old plastic CD that he fills with paper towel pieces. He puts the clipping into the case, with the roots on the paper towel that's moistened by some root-grow chemical. The top of the clipping is out of case. It's tough to describe.

Maybe I'll have him take some pix the next time he does it.