2009 Financial Review - Savers Get Dumped, Mortgage Rates Dropped, and Oil the King

Since it's the last day in 2009, I thought it sense to take stock of the past year and post a few bonus charts to help digest what has gone on. Let's start with the general theme for 2009. If you're a deposit holder or living off a fixed-income, then you've received the royal shaft. The Fed has forced down rates on savings, CD accounts, and all other fixed income securities in order help reinflate the banks and the stock market. This has been intentional and is another way responsible savers are paying to fix the mistakes the bankers made and hand them large profits and bonuses. Banks cannot lose money when they can get cash at 0-1% and invest it at 4-5%. The spread between short-term and long-term rates is a money-making machine.

The stock market has also benefited. Cash has flowed out of safe, but low yielding money markets and fixed income investments into the stock market. The bond market, and most noticeably Treasuries have also made out okay. It's one reason Treasury rates, even on longer-term maturities have remained so low. Commodities have done well also as low rates have prompted investors to borrow cash at low rates and invest it into commodities like gold and oil.

2009 Savings and CD Rate Trends

In one word, the trend was down. "Baby are you down, down, down." Rates began crashing which started in October 2008 and have continued to this day.

If 2008 was the year of the crash, 2009 was the year of the gradual melt-down. The Federal Funds Rate acted like a black hole, sucking rates in and down into its maw. So while the average savings rate started the year at 3.15% APY (not great to begin with), it ended at 1.55% APY. Longer-term CDs fared slightly better. Five-year CDs started at 4% APY and finished the year at 3.18% APY. Who wants to lock in a 5-year CD at 3%?

Mortgage Rates

As I've said before, what one hand takes, the other gives. One recipient of savers' forced generosity has been the mortgage market. Not only has the Fed forced down short-term rates but they attacked the mortgage-backed securities markets and the Treasury markets to bring down borrowing rates. If you wanted to buy a home or refinance your mortgage, there was never a better time from a mortgage rate perspective. But as the year ends, we're seeing that mortgage rates are rebounding to their start-of-the-year levels. The Fed has indicating that is ending its subsidy of the mortgage industry and rates are beginning to creep up. I wouldn't be surprised if we see 6% soon although public the Fed may intervene if rates rise to far, to fast.

While 30-year mortgage rates have risen above January levels, 1 year ARMs are still well below. That's because the ARM is tied to the Fed Funds rate. It's part of the steepening curve we are seeing between short-term, and long-term rates.

Asset Comparison

So, we know savers have gotten the bad end of the stick. Who has made out? The chart below shows that those that invested a $1,000 in oil at the beginning of the year did the best. While the stock market has gone up 60% from its lows, much of that gain is simply making up for ground lost at the beginning of the year. A savvy investor who realized that oil had come down to far, to fast in 2008 did very well in 2009. As the chart shows, gold bugs did okay.The graph below shows the return an investor would receive if they put $1,000 into the selected investments.

The gains for the following classes in 2009 were:

Gold: 16%

S&P: 36%

Oil: 117%

Savings: 2%

I'm missing bonds and hope to add them in the next couple of months as I update the analysis.

Looking Ahead

So, what's in store for 2010? Here are some thoughts.

• Savings and CD rates will bottom in the first quarter and start rising in the second half of the year after the Fed raises the Fed Fund rate. If we're lucky, we'll see 4% savings rates by the end of the year.
• Mortgage rates will be above 6% maybe even 6.5%. Look for the housing market to go nowhere. Those hoping to make money buying foreclosed housing now and flipping will be disappointed.
• The stock market will remain relatively flat. The bounce is over and rates are going back up.
• The dollar will strengthen slightly. Higher rates and faster growth will strengthen the dollar despite a growing deficit. Our worldwide partners are going to do worse than the US.
• Gold will come down. Higher rates means inflation expectations will recede. Gold will lose its luster.
• Oil will stay in the $80-100 range.

Now take any one or two of those predictions and assume it will be drastically wrong. For instance, Israel bombs Iran and oil prices go to $150. Or, rising interest rates prick the stock market recovery and the market drops by 20%. Because the one thing we know, is that the year almost never goes like we expect it to.

Happy New Year and a healthy, happy, and wealthy 2010!