Financial Issues Archives - Author, Doctor, Speaker, Joseph Bentivegna

Uncle Sam Trashes Savings Bonds

November 25, 1994

One of my favorite gifts is the savings bond. Unfortunately, our government is now quietly lowering the rate of return on this investment, thus forcing the middle class into the hands of a burgeoning class of financial advisers who often steer them into riskier investments.

The savings bond is the gift of choice for nephews, nieces and grandchildren because it cannot be used immediately. Dolls break and cash is squandered on cars, clothes and Bon Jovi CDs. The savings bond is merely thrown into the safety deposit box, where it slowly but surely pays compound interest so that college tuition bills can be paid. There is no need to peruse the financial pages, subscribe to Money magazine, or speak with a financial adviser who is telling you that investing in an Alaskan surfboard company is your key to retirement.

Savings bonds always increased in value and could be forgotten. Over the past two generations, savings bonds have dispensed at baptisms, graduations, birthdays and bar mitzvahs. This is about to end.

A savings bond is basically the same as any government note, a debt to be paid back at a future date. Since they are issued by the federal government, they are exempt from state and local taxes. Until November of 1982, the savings bond always paid a fixed rate so that a purchaser could look at a chart and know how much the bond would be worth in 20 years. At that time, it was decided that the bond would pay market rate, but there was still a guaranteed minimum return of seven percent. In March of 1993, the Treasury Department lowered the minimum return to four percent. This had the desired effect. Sales of saving bond plummeted 50 percent. In 1995, the minimum rate will disappear entirely and the bonds will pay 85% of the five-year T-bill rate.

Presently the five-year T-bill rate is almost six percent but this is a recent phenomenon. Two years ago, it was three percent range. Without the guarantee of a minimum return, savings bonds sales will decline even further. Now the reader may why wonder why this is such a horrible thing given that one can always purchase government securities through a broker or directly from the government.

Savings bonds are convenient and can be purchased from the bank for as little as $25. To buy a security directly from the government requires a minimum of $1,000. Aunt Millie may be generous, but she can’t afford $1,000 for every graduation. As for brokers, not everyone has one and those who do often find they have to joust with the broker over the latest investment du jour – cable companies in the Antarctica, pork franchises in Hasidic neighborhoods etc. Even supposedly safe investments can lose money.

Working people need a safe sure investment that is not subject to the whims of Wall Street or the chairman of the Federal Reserve. The demise of the savings bond is just another nail in the coffin of America’s middle class that is slowly rendering the United States to a Third World status – with huge income gaps between the rich and poor.

The Need for Socially Irresponsible Investing

July 30, 2015

As America becomes more polarized, many citizens are making political statements with their investing. Liberals shun the so-called evil oil companies while there are mutual funds for social conservatives to avoid investing in products such as birth control pills and IUD’s. This makes little sense. If you are a political ideologue, you should invest in products you despise. That way, no matter what happens, you’ll be happy.

For example, let’s say you are outraged by the corporate malfeasance of British Petroleum. It galls you that they reportedly cut corners on worker safety resulting in an explosion that cost 15 workers their lives and polluted the Gulf Coast for years. You can e-mail your complaints to politicians who will use robo software to delete them from their inbox; or you can make the smart move and buy British Petroleum stock. It has been battered so much that it is now paying a generous 6.3% dividend. If the stock continues to decrease, even though you lost a few bucks – you can console yourself with the knowledge that some canned BP executive is in divorce court with his screeching trophy wife who has been humiliated because she can’t update her fur collection. If the stock goes up, sell a few shares, donate to Bernie Saunders and distribute all the bumper stickers he sends you to your conservative friends. A win-win.

There are opportunities for conservatives too. For example, let’s say you are outraged that Tesla cars are selling because your taxes are subsidizing their purchases. You are looking forward to the coming day when this tax break expires and these liberal global warming statists will finally get their comeuppance. Now what is the chance that these subsidies will be allowed to expire? If you said “Zero'” go to the head of the class. Even in the unlikely event that Congress refuses to resume this subsidy, President Obama will simply issue a fatwa reinstating it and some toady liberal judge will rubberstamp his abuse of power. You will be outraged. That is unless you took the advice of this article. Then when you look in the Wall Street Journal, you will see that your Tesla stock got a 25% pop. You can sell a few shares, pick up a couple of Glocks and show them to your liberal friends. Such fun.

Socially irresponsible investing is a great way to get back some of your tax money. Outraged over the bail out of Goldman Sachs? No problem if you own the stock. It keeps going up and its bonds pay over 6%. If you can’t beat ‘em, join ‘em.

A golden opportunity now exists in Puerto Rican bonds which are now paying over 7% tax free. Puerto Rico is $72 billion in debt and makes Greece look like a paragon of fiscal responsibility. What is the chance that the taxpayers are going to bailout Puerto Rico? If you said “100%,” go to the head of the class. It doesn’t matter if Barack Obama, Bernie Sanders or Ted Cruz is the President. Any politician who opposes a bail out will immediately be pegged as a racist neocolonialist by the liberal media. But more important, Goldman Sachs and politically-influential hedge funds have gobbled up these bonds the way I gobble up my lovely wife’s ziti. When you, the sap taxpayer are forced to bail out Puerto Rico, these guys will be buying penthouses for their mistresses de jour. But if you own the bonds (stick with the General Obligation ones), you can get a piece of the action.

If more people engaged in socially irresponsible investing, our political dialogue would be much more civil.

A Penny for Your Parthenon

February 14, 2015

Buried on the back pages of the business sections of leading newspapers is a high stakes poker game that will soon migrate to the front page – an attempt by the newly-elected Greek government to renegotiate the terms of its recent bail out.

Greece is a member of the European Union; a collection of European countries that banded together recently, scraped their national currencies, and formed a common currency called the Euro. The problem with such an arrangement was that member countries could borrow money from the European Union in the form of bonds. The value of these bonds varies to some extent with the perceived probability they will maintain interest payments and whether to full value will be remunerated on their due date.

In the summer of 2010 several countries, Portugal, Italy, Ireland, Greece and Spain, had difficulty maintaining the interest payments on their respective bonds. This led to a financial crisis and credit crunch that culminated in a grand agreement whereby the European Central Bank, European Union and IMF (International Monetary Fund) promised to back their bonds as long as these countries agreed to austerity measures that meant higher taxes and fewer social services.

So far, Portugal, Spain, Italy and Ireland have managed to muddle along, but not Greece. The decrease in social services, higher taxes and increasing unemployment resulted in Greece recently electing Alexis Tsipras of the leftist Syriza Party as their Prime Minister. Tsipras has promised to renegotiate the 241 billion Euro debt (around $280 Billion) and has already ended some of the most unpopular austerity measures such as high property taxes and public sector layoffs. He also is threatening to default on the bond payments unless the debt can be restructured. The European Union has responded by saying they can default and leave the Union if they wish. If this happens, a significant number of Greeks will lose a large portion of their life savings, as their money is denominated in Euros. The leaders of the European Union believe Tsipras will never allow this.

Who will blink first? My bet is the European Union. Tsipras is playing a very strong hand. Tsipras has the good fortune of having a finance minister, Yanis Varoufakis, who not only is a respected economist, but an expert in game theory.

Varoufakis knows that if there is a threat of a Greek default, there is a possibility the contagion will spread to other European bonds resulting in Wall Street banks and brokerage houses losing their shirts. The overvalued stock market will soon follow. Even corporate debt could be swept up in this contagion. This is when the Greek debacle ends up on the front page. This is when the manicured hands of the Wall Street Welfare State start dialing their cell phones and instruct the professional politicians and central bankers to make a deal with Greece.

The situation is analogous to you buying a house with your profligate brother-in-law and splitting the mortgage payments. If your brother-in-law threatens to stop making his payments unless you make larger payments and reduce his, what choice do you have? You can tell him where to go, but then you lose the house. Or you can come to a deal.

Tsipras and Varoufakis are suggesting that the European Union inject $10 billion Euros into the Greek banking system by the end of February to give more time for the negotiations. When the European Union does this, the markets will stabilize the issue with return to the back pages and the Greeks will have won. If the European Union does not give them what they want, they will just threaten to default again.