Investments: Revenge of the Savings Nerds

Lights! Camera! Action! If the financial history of the first half of the 1980s were to be made into a movie, it could be called "Revenge of the Nerds." The stars would not be the gold bugs, Wall Street insiders, or real estate tycoons who made it big on the screen in the 1970s. No, the hot property of the 1980s is—drat it all!—a two-bit old-timer from the 1950s and 1960s. The "nerds" have returned to glory.

The nerds, as the investment firm Merrill Lynch recently explained, are the millions of Americans who put their hard-earned savings into low-paying passbook savings accounts and bank certificates of deposit (CDs). All through the late 1960s and '70s, these traditional savers saw their money ravaged by inflation and Regulation Q, by which the government kept a ceiling on the interest rate offered by banks. But now, after suffering years of embarrassment at cocktail parties and business lunches, the nerds became the new celebrities. Thanks to high deregulated rates and an anti-inflation policy by the federal government, they can hold their heads high. (The only exception are the traditional savers who finally gave up, withdrew their savings in 1980, and bought gold at $850 an ounce—they're the new nerds!)

Believe it or not, the top-performing investors for the first half of the 1980s are the traditional savers who continued to squirrel away their money—in money market funds, bank deposits, and Treasury bills. Savings accounts have outperformed gold, silver, commodities, stocks, bonds, and collectibles—even real estate—from 1980 to 1985. The high-interest-rate, low-inflation environment has made a bank savings account a good investment again.

What! Hard-money investment advisor Mark Skousen is advocating bank CDs? That's right. That's because there have been several fundamental changes recently that have made money funds and bank deposits a decent investment for the 1980s. These trends are likely to continue for several more years.

The 1980s have been characterized by three trends. First, there's low inflation. Despite record federal budget deficits, banking crises, and continued expansion of the money supply, price inflation has declined to 5 percent or less.

Surprisingly, this "low inflation" environment could stay with us for several more years. This is because, for the first time in monetary history, the Federal Reserve under Paul Volcker seems determined to keep inflation under control. The growth in the money supply, albeit volatile in the 1980s, has been sufficiently moderate on average to keep inflation from returning to the double-digit range of the late 1970s. Admittedly, there have been periods of sharp increases in the money supply, but they've been short-lived, followed by a restrictive monetary policy.

There is no evidence that the Fed is about to reverse its anti-inflation policy for the long term. The fact is that if the Fed expands the money supply too rapidly, Wall Street reacts very negatively-stocks and bonds drop like a rocket when a huge increase in the money supply is announced. According to the theory of rational expectations, which has recently gained considerable attention, the old Keynesian prescription of inflating the money supply to stimulate the economy won't work anymore—too many people have caught on to the game.

A second factor in the 1980s' investment climate is high interest rates. The main reason for persistently high interest rates is the fear of double-digit inflation, fueled by uncontrolled federal deficit spending. Bond holders demand compensation—higher interest rates—for the future depreciation of their money.

Frankly, I think it's very doubtful that Congress will gain control of government spending. Consequently, the government will continue to squeeze the private capital markets, keeping interest rates artificially high.

Third, we've had a boom-bust economy in the '80s. With high federal deficits and occasional banking crises, the Federal Reserve has engaged in a stop-and-go monetary policy. One year monetary policy is loose, the next it's tight. This has resulted in a boom-bust economy and a volatile climate for stocks, bonds, gold, and other speculative vehicles.

In sum, the phenomenon of low inflation, high interest rates, and a boom-bust economy will not disappear any time soon. As long as that is the case, savings accounts will be the most secure investment for the 1980s. The conservative investor should keep the majority of his portfolio in safe money market instruments, such as money market funds, bank money market accounts, and FDIC-insured certificates of deposit. (Most investors would include Treasury bills in this category, but I can't recommend lending money to an irresponsible government—but that's the subject of a whole column of its own.)

Stocks, including gold shares, belong in your portfolio only as a short-term trading vehicle, when the market looks favorable. Be prepared to unload immediately when market conditions change.

Where can you earn the highest yield on bank accounts and CDs? According to Bob Heady, editor of the newsletter 100 Highest Yields, it pays to shop around. You can earn 2–3 percent more than the national average on CDs or money funds by checking out the competition. Banks in California and Texas, for example, tend to pay higher rates than banks in other states.

To get the names of banks and savings institutions that pay the highest yields, you can get a trial subscription (4 issues) of 100 Highest Yields for $10 (P.O. Box 402608, Miami Beach, FL 33140). This weekly newsletter ranks the top 100 banks and S&Ls in the country for highest yields on money market accounts and bank CDs.

If you want liquidity as well as safety, I recommend a money market fund. One of the most consistent high-yielding funds is the Kemper Money Market Fund (P.O. Box 1557, Kansas City, MO 64141, 800/621-1048 or 816/474-8520).

Well, movie lovers, I'm afraid "Revenge of the Nerds" won't be a smash hit. Let's face it—bank CDs and money funds may preserve your capital, but they will never be the hot topic at a cocktail party. Nerds never were the life of the party, anyway. No hot-shot wheeler-dealer is going to call you aside and whisper "money market fund" in your ear. Ho hum.

Mark Skousen is a financial author who lives with his family in the Bahamas. He is the editor of the investment newsletter Forecasts & Strategies.