I’ve written about TIAA’s “Marketsafe CD” products, and those issued by Everbank prior to its acquisition by TIAA. I’ve suggested that the offering of these products violates the 1933 Securities Act, and I maintain that position. More importantly, I have always written to advise depositors to avoid thinking of these products as CDs (they should not be called CDs), and I am doing that again here.

The latest product purports to give depositors so-called “safe” exposure to the Brazilian Real, the Euro and gold and emerging market equities. In this case, these assets are all priced using ETFs on a pricing date, and then measured against the price of those ETFs in 4 years. The investor gets back their principal and the weighted appreciation, if any, at maturity. Interestingly, the video, featuring Chris Gaffney, uses the hypothetical appreciation of 6% over 4 years which would underperform by at least half the compounded performance on a 4-year CD (where you can still earn well over 3% per year).

With its past products, TIAA and Everbank provided some rationale for tying their products together. They represented earlier products as a play on oil currencies here and here a play on emerging market currencies here or emerging market equities here or a rise in interest rates here or here.

I am not sure of the rationale for tying together the Brazilian Real, the Euro, gold and emerging market equities. It now seems to be a kind of “we think you’ll like this” type of thing. A prudent investor might look at which of these things they want to own and invest in them though the ETF directly or some other means. For example, my own personal opinion is that while gold and the Euro might appreciate against the dollar over the coming 4 years, the Brazilian Real and the emerging market ETF could easily fall quite severely. I would look at the gold ETFs (IAU or GLD) as one alternative, and interest-earning Euro accounts as another.

As anyone who has invested in any of TIAA’s or EverBank’s Marketsafe products knows, it just takes one nasty thing in the basket to destroy it and to leave you waiting for maturity to get your principal back. Previously, however, TIAA damaged your wealth but did not hit you with a 1099 reporting Original Issue Discount (OID). However, if you read the terms of the latest offering, TIAA will hit you with an OID statement for imputed interest in each of the four years that you are holding this product. While the bank would have had an obligation under Federal Tax law to have reported OID, EverBank did not do this prior to its acquisition and the fact that they are now doing it means that their products go from a dreadful idea to a ever worse one.

Bottom line: Continue to avoid TIAA Marketsafe CDs.

Those paying taxes this month in States like New York, New Jersey and California have been hit with quite a wake up call over the last few days.

Our tax bills, as a result of the 2018 Republican tax cuts, are much higher, especially since we have lost all sorts of deductions for our state taxes.

Out of the woodwork are emerging two groups of people eager to present their solutions to making April 2020, as compared with this April, a little less painful:

1. Real estate agents from Florida and Texas.
2. Those pushing municipal bonds.

I have nothing bad to say about the former, and I am not going to comment about the risks and benefits of relocating to Florida or Texas (I do know that New York spends a lot of money each year checking to be sure that former NY residents have met the required criteria of residency in another state and tracking them down for past taxes where they haven’t).

Rather, I want to address the people pushing municipal bonds and municipal bond funds. I am going to say, quite simply, that my view is that buying these instruments at this time is a terrible idea for all but the extremely wealthy. Here are 2 reasons:

First, most people, especially now, need their liquidity and should not tie up large amounts of cash in a low interest rate environment. One-year municipal bonds - if you can find them – in New York or California have a yield to maturity below 1.40%. Even if you are in a 50% effective tax bracket, that is still a fully tax equivalent return of only 2.80%, and you can still get 2.80% (or better) in a 1-year CD. Unlike municipal bonds, however, you can withdraw your money early from 1-year CDs with a reasonable early withdrawal penalty (BestCashCow recommends that you identify CDs with only three month of interest as such a penalty). As long as you stay within FDIC and NCUA limits, your CDs bear no credit risk. Check online CD rates here. Check local rates at banks here and credit unions here.

Second, municipal bond interest rates are extraordinarily low. You need to go out 30 years to find a municipal bond yielding over 3%. As a point of comparison, I was purchasing high-quality AA New York municipals in 2009 (during the financial crisis) that were seven years in duration and were yielding over 5%. As a general rule, I do not recommend that anyone should buy municipal bonds of more than 5 to 10 years in duration under any circumstance. At the moment, high quality municipal bonds of those durations have tax equivalent yields that, again, do not offer significant premiums over 5-year CDs. They also are extraordinarily risky as they can lose tremendous value (even those of intermediate durations) should long-term rates increase.

Bottom line: Wait until you see higher long-term rates before considering municipal bonds.

There are many people who believe that the 2008-2009 financial crisis marked a seismic shift in the interest rate paradigm and that interest rates will never go back to a pre-crisis “normal”.

When Jerome Powell became Chairman of the Federal Reserve, he seemed determined to raise rates back to a new normal long-term goal of 3%, and in fact stated that the Fed intended to raise the Fed Funds rate above that level. But, the Fed Funds rate now sits at a target of 2.25% to 2.50%, and may not be going higher any time soon as Powell has bowed to Presidential pressure. Some Fed governors and former Chair Janet Yellen have recently come out and said that the next Federal Reserve move could well be to cut. And, today, Kyle Bass says that interest rates could be back to zero before the end of next year.

The idea of interest rates going back to zero concerns me, as it does many. It is, indeed, difficult to fathom how we could finally have pulled out of this recent multi-year period where the public at large was forced into risk assets in order to avoid deterioration in their wealth, only now to be heading right back into it.

Kyle Bass is pretty smart and, while he isn’t always right, he has made some very prescient predictions in the past. Those who can tolerate Brian Sullivan, can watch Bass’s interview here (he is largely talking about China, and doesn’t make this prediction until the end):

While Bass did not got into too much detail about how he formed his hypothesis, he did say he believes that US will experience a slowdown following a global economic slowdown beginning by the end of this year. One might surmise that he believes the precedent is in play for the Fed to use all bullets in its resolve to fight a global economic slowdown. The additional reality here is that interest rates around the world remain at or near zero and unless they start to move higher and stay higher, the Fed could need to move rates lower to prevent the US dollar from becoming too strong. Plus, the President has Chair Powell’s ear and if he remains a free man, it is a certainty that he will be lobbying forcefully for as many rate cuts as possible just in front of the 2020 election

Bottom line: This could be a good time to begin to consider putting some of the cash that you cannot afford to risk into long-term time deposits (Certificates of Deposit). Check the best 3-year CD rates, 4-year CD rates and 5-year CD rates here.