As 2023 draws to a close, we wanted to share some perspectives on the past year and some thoughts on what the year ahead might hold.

Why Max Exists

Max was founded in response to the Global Financial Crisis. In March 2009, as some of the largest banks in the country were on the verge of failing, it became clear that then-current approaches to cash management were fundamentally flawed. For years, large banks and broker-dealers had relied upon cash sweep programs (known in the industry as brokered deposits) as a means of convincing customers to keep all of their money in one place. The reality is that brokered deposits are fraught with risk, both for banks and depositors, and are also plagued by conflicts of interest. These cash sweep programs now serve primarily as a means for brokerage firms to profit off of clients’ cash, at the expense of the client. We knew there had to be a better way to manage cash, and so we set out to create Max, with a simple focus: your best interest.

The Year in Review

As a leader in cash management for more than 10 years, we’ve devoted ourselves to creating a safer, more liquid, higher-yielding approach to managing cash. It turns out that depositors can be best off simply by keeping their money in their own bank accounts — so long as they select the right banks. By holding money directly in your own name, you retain full transparency and same-day liquidity, with no intermediary custodian and no single point of failure.  

The importance of the simplicity of Max became abundantly clear in March 2023, when large banks again began to fail and people worried whether their funds were safe. Max members slept soundly, knowing exactly where their cash was, confident that their money was safe and sound in their own FDIC-insured bank accounts.

Beyond the primary importance of safety and liquidity, the other big story of 2023 was yield. Interest rates rose dramatically, surpassing 5%. Certainly, those who kept their cash in online banks in 2023 earned considerably more than those who kept their money in brick-and-mortar bank or brokerage accounts. But with rates changing so frequently, it’s hard to keep tabs on which banks are offering the best rates at any given point in time. Again Max excelled, helping our members earn substantially more than they would have elsewhere by keeping an eye on rates and helping our members reallocate their cash to whichever banks were offering the highest yield each month. Max’s current top rate of 5.36% is about 1.00% higher than the leading online banks, and more than 11x the national savings average (a paltry 0.46%, according to the FDIC).¹

A Culture of Innovation

Our team worked hard in 2023, continuing to innovate and build new features for the benefit of our members.

• We added support for more high-yield savings banks on the Max Common Application, making it easy to open additional accounts and increase your FDIC insurance coverage with just a few clicks.
• We upgraded Max Checking, partnering with a new bank to provide faster funds transfers and superior service.  
• We migrated all Max settings onto a single page, making it easier to set custom bank-by-bank limits, so that you remain in full control of all your money.
• We simplified how members set their target checking account balance, and added clarity to how to request funds transfers. You can expect more improvements to this interface in 2024.
• We pioneered a multi-bank savings goal feature, making it easy for you to set and monitor progress towards goals directly from your Performance page.
• We added more integrations, making it easy for your financial advisor to incorporate your Max balances into your financial plan. 

In 2024, we’ll accelerate our product development efforts to serve you even more fully. Correspondingly, we’ve been busy investing in our team and technology platform to make Max even better, faster, and simpler.

Member Feedback

We appreciate those who took the time to complete our Max Member Survey. We’re pleased to report that our members gave Max its highest-ever Net Promoter Score, putting Max just ahead of Apple and Google in terms of customer satisfaction. We’re proud of our product and member services teams. Our aim is to delight every customer, and we’ll work hard to incorporate your feedback into our product plans for 2024.

The Year Ahead

Many have been speculating on what might happen with interest rates in the year ahead.  We don’t have a crystal ball, but ever since the start of the pandemic, we’ve consistently held the view that fiscal and monetary stimulus would lead to significant inflation, which in turn would necessitate higher interest rates. In February 2021, when interest rates were still set at 0% and the Fed was indicating that inflation was “transitory,” our view was markedly different. Witnessing the 35%² growth in commercial bank deposits during the pandemic, we concluded that rates would likely end up in the 5.5%-6.0% range. Our rationale was pretty simple: with such a large boost to the money supply, absent a change in the velocity of money, inflation was inevitable. Even to this day, we’ve only experienced 19.2% cumulative inflation since March 2020³, suggesting that there’s more inflation in store before we can get back to an equilibrium. Despite the market’s optimism of rate cuts in 2024, we may be in a “higher for longer” environment in 2024, at least until such time as the influx of fiscal and monetary stimulus is fully absorbed into the economy. With much of the remaining inflationary pressures seeming to come from excess consumer demand, it may be that a recession is necessary to ‘reset’ consumer expectations and get prices under control. Time will tell.

Regardless of the rate environment, and no matter your outlook for whether rates are poised to rise further or fall, Max is here to help you make sure you’re earning the highest rates. Over the past 10 years, Max has delivered the highest yields in the market.  Our back-testing analysis has demonstrated that Max members have outperformed in all market environments.

We are grateful for the trust that you have placed in us. We’re proud to serve the clients of more than 2,500 wealth management firms across the country, as well as self-directed investors who are looking out for their own best interest. 

We wish you and your family good health, happiness, and success in the year ahead.

Sources: 

¹FDIC National Savings Average as of 11/17/2023.

²St. Louis Fed FRED Total Deposits, All Commercial Banks.

³US Inflation Calculator as of 12/12/2023.

In the weeks since the sudden collapse of Silicon Valley Bank, other banks, brokers and fintechs have scrambled to roll out increased FDIC insurance solutions to capitalize on the opportunity to attract new deposits. Unfortunately, in the mad rush to roll out something, anything, they are exposing your clients to the very same risks that they should be seeking to avoid.

The collapse of SVB was scary for depositors for two reasons.

First, when a bank fails, any deposits in excess of $250,000 — the Federal Deposit Insurance Corp. limit — leave depositors unsecured, which means they may not get all of their money back.

Second, when a bank fails, even insured deposits can’t be withdrawn until the FDIC takes over the operations of the bank or orchestrates a sale. 

If you think about why clients hold cash, it’s for safety and liquidity. Any solution that puts either safety or liquidity at risk would defeat the purpose of holding cash. That’s why we created MaxMyInterest.com and MaxForAdvisors.com, to create a better, safer, more liquid, and higher-yielding way for clients to manage cash.

The Problem With Sweep Accounts

For decades, banks and brokerage firms have used sweep accounts (known in the industry as brokered deposits) to earn a spread for themselves on client cash. While these solutions are marketed to clients as a means of keeping cash safe by obtaining increased deposit insurance, if you peek under the hood, you’ll find that they expose clients to safety and liquidity risks and are rife with conflicts of interest. 

To identify these risks, it’s first helpful to understand how these sweep programs work. Essentially, an originating institution — could be a bank, brokerage firm, or fintech company — tells you they can provide increased FDIC insurance by spreading (selling) your cash across their network of other banks. That may sound okay on paper, but the reality is that your cash gets swept up into omnibus accounts held in the bank’s name, not in the client’s name. 

This means that if the originating institution were to fail, your clients would lose access to all their funds until the resolution process is complete. In the case of a bank, that may happen in a matter of days, but if a fintech has custody of a client’s funds and they fail, clients may be stuck waiting through a bankruptcy process. Just ask anyone who thought their funds were safe at FTX. 

If a client needed that cash to buy equities when the market dips, too bad. And if they needed the money to make a tax payment or close on the purchase of a house, they may be out of luck, with dire consequences. Clients can’t contact the underlying banks that hold their funds, since they have no relationship with them. 

Furthermore, they don’t know to whom their deposits were sold, and if they happened to be placed with a bank where clients already hold other deposits, they may overlap and exceed the FDIC limits. This means that clients might not be fully insured, even when you thought they were. 

Avoiding Unnecessary Risk

These risks are avoidable. In fact, the main beneficiary of clients taking on these risks is the very institution that is brokering their deposits, since in the process of selling deposits out to other banks, they keep a spread for themselves, passing along a net rate to the customer while hiding the embedded fee or spread that they’re keeping. In short, there’s a conflict of interest that leaves the depositor with less yield and more risk than had they just opened more bank accounts directly in their own name. 

In 2009, in the midst of the Financial Crisis, I identified these risks and began managing my own cash differently, spreading it out across my own accounts held directly at multiple banks, so that I’d have the benefit of increased FDIC insurance coverage while maintaining full visibility, liquidity, and control over my cash, with no single point of failure. When I found that my safer approach had also generated tens of thousands of dollars of incremental yield, I figured that many more people could benefit from this same approach, and we created MaxMyInterest in 2013 to create a new, safer, higher-yielding way to manage cash.

It Pays to Read the Fine Print

Not 48 hours after the collapse of SVB, many advisors, banks and fintechs began repeating the same mistakes of the past. They looked for solutions that purport to keep cash safe without considering the implications of these solutions for safety and liquidity. As a fiduciary, when it comes to your clients’ cash, it pays to read the fine print. By avoiding brokered sweep accounts, you can keep cash safer, more liquid, and earn higher yields at the same time.

Don’t squander the chance to reassure clients they are protected while also setting them up for even greater long-term success.

With the twin losses of Silicon Valley Bank—the second-biggest bank failure in U.S. history—and Signature Bank, the federal government has moved quickly to shore up public confidence, providing account holders with access to all money, even on accounts exceeding the Federal Deposit Insurance Corporation limit of $250,000, which in the case of SVB, included more than 90% of their deposits.

Despite these assurances, the renewed focus on the health of U.S. banking system has caused considerable consternation, not just within the financial services sector, but more widely. Across the country, Americans are asking: How safe is my money? If my bank were to fail, would I get all my money back? What should I do if I have more than $250,000 in cash?

Cash is an important part of any investor’s portfolio, but, too often, financial advisors have little insight into how much their clients are actually holding. For financial advisors, this crisis offers an opportunity not only to strengthen client relationships but to spur a larger conversation about how cash fits into an overall portfolio, and ensure the money clients hold is fully protected, whether it’s in the brokerage account or not. To start a dialogue with clients, consider the following:

De-Risk and Maximize Interest

At minimum, ensure that your clients’ cash is FDIC insured. FDIC insurance provides protection on deposits up to $250,000 per depositor per account category, per bank. If cash exceeds those limits, clients should spread their savings across multiple banks to keep within the threshold— otherwise, they’re putting themselves at risk if a bank collapses. And by spreading cash across multiple banks, advisors can help their clients eliminate the risk of a single point of failure. Much as in equities, with cash, diversification is key.

Once your client knows their money is safeguarded across multiple accounts and backed by the full faith and credit of the U.S. government, the big difference boils down to interest rates. According to the FDIC, the national average yield for savings accounts is 0.35% APY. However, online banks, which have lower operating costs, typically offer higher interest rates—up to 5.05% APY today. That means a client with $100,000 in cash could earn as much as $5,000 per year in incremental interest – compared to just $350 per year at a bank paying the national average.

Beware the Fine Print

How can you ensure clients’ cash is safe, liquid, and earning the maximum in interest? It’s critical to read the fine print, as not all cash solutions are created equal.

Historically, the brokerage industry used so-called ”brokered deposits” (often referred to as “sweep accounts”) to try to assure clients their cash was safe. Deposit brokers are intermediaries who sell client’s deposits to other banks in exchange for earning a spread. But these services can be risky for clients because the cash is not custodied in the client’s own account, nor do account holders have immediate access to their money. If the originating bank were to fail, clients lose access to all their cash. There’s no direct relationship between the client and their cash in each bank. That’s a mistake, and a risk that’s not worth taking. After all, these brokered deposit solutions provide lower yield, with greater risk and less liquidity, vs. simply keeping cash titled in a clients’ own name in their own bank accounts. By skipping deposit brokers, clients can hold cash directly and have immediate liquidity, with no single point of failure.

The takeaway: when evaluating cash management solutions for your clients, make sure the money is held directly in the account holder’s name with same-day liquidity. Otherwise, you’re taking unnecessary risk.

Gain Greater Visibility

It’s difficult for advisors to get the full picture of their clients’ cash holdings. You might discuss the matter during a client’s annual review, but those figures are likely to fluctuate throughout the year any time a client makes a large purchase, receives a bonus or comes into an unexpected windfall.

According to the Capgemini World Wealth Report 2022, high net worth individuals hold 24% of their assets in cash and equivalents. By talking with your clients about cash and providing them with a way to earn more on held-away cash, you will gain better visibility into how much they are holding. Doing so can help you grow your AUM and deepen existing relationships.

As an advisor, it’s your fiduciary responsibility to understand all aspects of your client’s financial lives—especially an asset class that typically comprises one-fifth of their liquid net worth. If you’re not asking about their cash, my question is: Why not?

For many, the demise of Silicon Valley Bank and Signature Bank has brought back stark reminders of the 2008 financial crisis. Thus far, we’ve avoided a system-wide collapse, and the banking sector is, by many measures, much stronger than it was in 2008. But financial advisors and their clients must not close their eyes to potential risks.

President John F. Kennedy said: “In crisis, be aware of the danger—but recognize the opportunity.” As we confront yet another potential crisis, don’t squander this opportunity. Both reassure clients they are protected while also setting them up for even greater long-term success. 

Holistic Cash Solution

Max helps advisors accomplish all of these goals, delivering increased deposit insurance, industry-leading yield, and same-day liquidity, since all cash is held directly in clients’ own bank accounts. Financial advisors can register for a free advisor dashboard at MaxForAdvisors.com, while clients can get started earning more right away at MaxMyInterest.com.

For much of the last decade, the yield on cash has been practically nonexistent. As a result, cash was simply not that high a priority for clients or their advisors. 

In 2023, it’s a different story. As the Federal Reserve began to raise rates aggressively to fight inflationary pressures, the rates paid on deposits has risen dramatically. With minimal effort, clients could be earning more than 5% on their cash reserves, while keeping their funds FDIC-insured.

How Much Cash Do Clients Hold?

After a decade of enduring few good choices for cash, clients need help figuring out where to put the cash they have chosen not to keep in their brokerage accounts. And as this cash comes into view, advisors can help clients identify other asset classes that might provide better returns than cash over time.

Where Should Clients Keep Cash?

Now that rates are over 5%, more advisors will no doubt be helping clients answer the question, “Where should I be keeping my cash?” Today clients often turn to Google, which often leads to visiting an advertising-driven rate comparison site that has incentives to promote a bank that may not offer the best options. And for higher-net-worth clients, a single bank can’t provide sufficient FDIC insurance coverage, nor is there any guarantee that the bank that pays a high yield today will continue to provide competitive yield over time. Fortunately, there’s a way to help clients continuously earn the best yield without advertising or ongoing effort.

Is There a Solution for Advisors and Clients?

MaxMyInterest (or just “Max” as it’s commonly known) is a platform that helps clients open and manage high-yield savings accounts, so they can take advantage of rate changes at banks while staying below the FDIC limits even if they hold large cash balances. Advisors can register for a free client dashboard in 2 minutes at MaxForAdvisors.com, providing access to current rates, client balances, and the ability to help clients enroll in just a few minutes.

Voted as the best cash platform for advisors and their clients according to the T3/Insiders Forum survey for 5 years running, and winner of the “Wealthies” Award from WealthManagement.com, Max is a solution that’s truly differentiated and a WealthTech success story.

With Max, a client’s cash is always safe, fully liquid, and held in their own FDIC-insured bank accounts. Max provides a dashboard and consolidated tax reporting, while clients can receive statements from their banks and contact them directly to access their funds same-day if needed. Max integrates with leading wealth management platforms including Orion, Redtail, Wealthbox, MoneyGuide, and Morningstar ByAllAccounts. 

How Do I Get Started as an Advisor?

Visit MaxForAdvisors.com to register for free access to the Max Advisor Dashboard, where you can view client balances and access materials to share with clients. Many advisors also choose to share articles about Max from leading publications such as The Wall Street Journal with clients. 

The Max Advisor Dashboard includes a getting started guide, fact sheet that provides up-to-date rate information, and the ability to search support content. Have questions? Advisors can schedule a phone call or request a live demo to find out how they can get started.

Now is the time to help clients start earning more on their cash. Register at MaxForAdvisors.com today to learn more and get started.

Today marks an exciting day in the history of banking. Today, the highest rate on the MaxMyInterest.com platform has topped 5% for the first time, proving that by creating a more efficient banking system, customers and banks can both be made better off.

As a result of our team’s hard work, millions of American households now have access to the best yields in the country on high-yield savings accounts – accounts that can be opened in less than 2 minutes without the need to fill out endless forms, set logins or passwords, or wait for trial deposits. And since Max doesn’t accept advertising or referral fees, banks are able to attract the highest quality customers at lower cost, enabling them to pass along higher interest rates to depositors.

How did we get here?

Our team has been working relentlessly for nearly 10 years to wring out every inefficiency we could from the banking system. The result: higher yields for depositors with greater safety and same-day liquidity. And for banks, lower operating costs and less risk. Today, the average interest rate paid on a savings account in America is a paltry 0.35%. But Max members are earning up to 5.01% APY on exactly the same product: FDIC-insured bank accounts.

The concept for Max dates back to the Financial Crisis when banks were failing and I had a need to find a safer place to keep my cash. The traditional brokered deposit solutions offered by the major brokerage firms suffered from several fundamental flaws. They were marketed as safe and liquid, but after looking under the hood I concluded these deposits were not necessarily fully insured nor were they fully liquid. So, I set out to find a better way to manage cash.

Discovering Higher Yield

In my search to figure out how to keep cash safe, I stumbled upon online banks, which offered higher yield than traditional brick-and-mortar banks since they didn’t have to incur the costs associated with operating branches. Since they were FDIC-insured just like any other bank account, it didn’t really matter which banks I picked. So long as I kept my balances below the FDIC insurance limit at each bank, my funds were effectively backed by the full faith and credit of the U.S. Government.

As we got started, we learned that the biggest thing standing between people and their ability to earn more on their cash was themselves. People are busy, and managing cash is never at the top of your “To Do” list. So, we invested several years to figure out how to make it easy to open multiple bank accounts at once by filling out a single form. That way, whenever we identified higher rates, our software could help customers reallocate their cash among their own bank accounts in search of the highest yield, while keeping all funds within the FDIC insurance limits at each bank.

Impact

Today, many of our clients are earning tens of thousands of dollars more in interest each year than they would if they had just left their cash in their existing brick-and-mortar bank or brokerage account. That’s enough for an extra ski vacation each year, summer camp for your kids, or a nice contribution to your niece’s college fund. Compounded annually, using Max could fully cover college tuition for your kids, buy a new car, or enable you to make impactful charitable donations to the causes that matter to you most.

Economists look for solutions that are pareto efficient, meaning that everyone is made better off as a result. In Max, we’re proud to have built a solution that helps make depositors and banks better off. It’s easy to enroll at MaxMyInterest.com to start earning up to 5.01% APY on your cash, held directly in your own FDIC-insured bank accounts. And the sooner you start, the more you can earn!

Time to dust off a playbook advisors haven’t had to use since the ’80s

(Portions originally published in WealthManagement.com April 26, 2022)

Most financial advisors, and for that matter, their clients, barely remember what it feels like to live through a period of high inflation.  But inflation can wreak havoc on even the most carefully crafted financial plans and portfolios.  As a result, dusting off the inflation playbook is critical to providing clients with the best advice for how to navigate our current economic predicament.

The last time we experienced inflation at all comparable to what we’re seeing today was in 1982.  I was in grade school at the time, but remember vividly my parents discussing the rapid escalation in housing prices in Toronto, and that with mortgage rates hovering near 20%, homeowners would end up paying for their houses several times over the life of a mortgage.

Ever since Alan Greenspan took the helm of the Federal Reserve, we’ve lived in a benign inflationary environment, with the Fed generally meeting its goal of 2% annual inflation.  With such low levels of inflation, it’s relatively easy to make sound financial decisions.  Moreover, cash flows – and, by extension, the companies that generate them – are more highly valued since future income is discounted at a lower rate.

Buy Now

During the Financial Crisis, I had the privilege of living in Japan, where inflation was benign.  When I moved to Tokyo in 2007, a box of takeout sushi cost 200 yen.  By 2010, the price had declined to 199 yen.  In sum, you could count on things costing pretty much the same each year, making it easy to plan and easy to make spend-vs.-save decisions.  After all, there was no motivation to buy something today because you could feel pretty confident that next month or even next year, the price would be the same. As a result, there were strong incentives to save.  It is perhaps no surprise that the Japanese have among the highest savings rates in the world.

By contrast, in an inflationary environment, there’s a strong incentive to buy now. Planning to buy a new car?  Better to buy it now, rather than pay 10% more a year from now.  Might your roof need to be re-shingled sometime in the next few years?  Better to take on that project now, unless your money is generating after-tax returns that exceed the rate of inflation.

Real Estate and Cash

While in Japan, I met a friend who grew up in a wealthy family in Mexico, and who had lived through periods of high inflation.  I asked him how they managed to preserve their wealth. His two pieces of advice?  Buy real estate, and keep money in bank savings accounts.

The first is easy to understand: real estate and other real assets tend to appreciate in line with real growth in GDP plus inflation.  So, at minimum, real estate should keep pace with inflation, plus another 3% or so per year in the average American city.  However, since most people purchase real estate using a mortgage, the associated leverage helps magnify these gains.  Over long periods of time, most American households have established the bulk of their wealth through appreciation in their primary residence.  If inflation picks up, the nominal price of the house should keep pace, yet the real value of the mortgage declines, creating further equity value for the homeowner.  In sum, houses are generally both a good investment and a good inflation hedge.  It’s perhaps not surprising, then, that when the Fed started printing trillions of new dollars during the pandemic, investment firms like Blackstone began buying up residential real estate in significant scale.

The second piece of advice is a bit less obvious, but equally important.  Like it or not, nearly all clients choose to hold cash.  Some prefer the flexibility it affords to buy the dips in the market; others sleep more soundly at night knowing they have a substantial cash cushion to help weather uncertainty inherent in economic cycles, and this cash cushion enables them to take more risk in other aspects of their portfolios.  For whatever reason clients hold cash, it’s important to ensure it is fully-insured and earning as much as possible.  And, as my friend relayed, when inflation picks up and rates start to rise, banks are among the quickest to adjust their interest rates upward.  This knowledge in part helped inform my decision to found Max (MaxMyInterest.com), which helps advisors and their clients ensure their cash is always earning the highest yields in the market in FDIC-insured, same-day-liquid bank accounts.

Now that the Fed has finally acknowledged that inflation is more than transitory, it has begun raising interest rates.  Our study of the last rising rate cycle suggests that clients who hold funds in online savings accounts should capture 50-70% of these gains, while those who keep their cash in brick-and-mortar bank accounts or brokerage sweep accounts may not benefit at all, meaning they will fall further behind as inflation erode the value of their dollars.  While keeping cash in high-yield savings accounts may not fully protect you from inflation, it’s a lot better than buying bonds, which will almost certainly decline in value as rates rise, and definitely better than accepting the paltry yields that most banks and brokerage firms offer.

Gold and Crypto

Other traditional hedges, such as gold, can help protect portfolios against inflation over the long term, but gold is expensive to store (even if you’re not storing physical gold yourself, you are still paying someone else to insure and store it) and its price is fairly volatile, so unless you’re particularly good at timing the market and anticipating inflation in advance, you run the risk of buying high and selling low.  Still, modern portfolio theory would suggest that most clients should keep a few percentage points of their portfolios in commodities, including gold, and increasing allocations to gold may also help clients feel more confident that they’re doing something to protect against inflation.

Much has been said about cryptocurrencies, and many wondered whether they might serve as a good hedge in times of higher inflation.  While it’s still too early to tell, so far, there isn’t much evidence to suggest that cryptocurrencies will serve as a good inflation hedge.  They are simply still far too volatile, and at present seem to be more correlated with broader market risk appetite as opposed to anything else.  True, cryptocurrencies such as Bitcoin have, in theory, a limited supply, and so in that respect they have the potential to keep pace with inflation, but their fundamental value lacks clarity, making it difficult to know off of what base they should keep pace with inflation.  After all, if one Bitcoin is inherently worth $20,000 and it keeps pace with inflation at 10% a year, then a year from now it may be worth $22,000, significantly less than today’s price of approximately $40,000 per Bitcoin.  Of course, it’s also possible that Bitcoin may be worth $200,000, or $0.  It simply appears to be too volatile an asset class to serve as an inflation hedge for all but the wealthiest of clients.

One final consideration when thinking about inflation: taxes. At present, capital gains taxes are not inflation-adjusted. This means that if I invest $200,000 in the stock market during a period of 10% inflation and my portfolio goes up to $220,000 as a result, while I’ve earned zero real return, I have a nominal (and taxable) gain of $20,000.  Simply put, the higher the rate of inflation, the more tax you pay, even if you haven’t experienced any real gains. Financial advisors may have different strategies to help clients with tax planning, but it’s important that clients understand that – however excited they may be about the nominal growth in their portfolios over the past two years – inflation and taxes must be taken into consideration.

(A version of this article was originally published in The Bond Buyer, February 7, 2022)

For much of the past year, I’ve felt pretty alone – at least as it relates to inflation.  While I’ve been ringing the alarm bell for well over a year, expert after expert insisted that fears of inflation were overblown.  In fact, back in February 2021, I wrote the following in The Bond Buyer:

“With the pace at which the U.S. government is printing money, inflation seems all but inevitable. Our national debt has risen by more than 40% in the past four years, and as we begin to recover from the pandemic, inflation could become more apparent in consumer prices.”

For much of past year, though, the Federal Reserve insisted that inflation was ‘transitory,’ a product, Chairman Powell said, of pandemic-specific dislocations and not a massive money-printing program unprecedented in scale and scope. And so monetary stimulus continued, through bond buying and a persistent zero rate policy at the Fed overnight window, coupled with multi-trillion-dollar fiscal stimulus programs. Our national debt ballooned, and now inflation rates are higher than they’ve been since the 1980s, a period of dramatic inflation that most of us had hoped we’d never see again.

As it turns out, our current predicament pre-dates the pandemic. In December 2016, after walking past the national debt clock near Times Square, I posed the following question on Twitter: “What will we reach first, Dow 20,000 or Debt $20 trillion?” Here we are, more than five years later, and now we’ve surpassed $30 trillion in national debt and the Dow Jones Industrial Average exceeds 33,000. What have we gained?  Are the stock market gains that we have enjoyed real, or largely nominal? There’s a good argument to be made that, while many of us may feel wealthier, in real terms we’re not much better off after all.

Worse, the bottom half of the income distribution, which isn’t materially exposed to equities or real estate, is unquestionably worse off today than they were pre-pandemic. Inflation has driven higher prices for staples such as food, gasoline, and rent, increases that aren’t sufficiently offset by nominal wage gains. As a result, our country’s focus on full employment arguably did more to hurt the working class than help it. One might even wonder whether our current political divide is really rooted in an economic divide – who has benefitted from post Financial Crisis policies and who has suffered?

The risk-on environment

In early 2020 as the pandemic unfolded, there was initially grave concern across equity markets. What would large scale lockdowns do to our economy? Market volatility increased dramatically in a moment eerily reminiscent of the Financial Crisis. But then something strange happened. The market bounced back in a matter of weeks, followed by a year and a half of meteoric rise. Equities went up. Real estate prices went up. Cryptocurrency prices went up. 

In retrospect, the ‘risk-on’ environment of the past year and a half has made perfect sense: with both fiscal and monetary policies intent on pumping trillions of new dollars into the economy, inflation was all but inevitable. The only way to protect oneself against inflation was to invest in those asset classes most likely to keep pace with these nominal gains. Cash was trash, as the expression goes, and anything that could serve as an inflation hedge was bound to outperform.

Now that the Fed has acknowledged that inflation is more than transitory, a series of rate hikes are on the way. The market consensus is that rates will rise by two to three percentage points over the next three years. What will that mean for us all?

As we begin to reverse course on rates, the big “risk-on” trade is already beginning to unwind.  Technology companies, which tend to generate zero (or negative) near-term cash flow, are valued based on a stream of anticipated future cash flows, discounted to the present. As rates rise, the discount rate increases, and the present value of those cash flows declines.  Correspondingly, so do share prices. The same goes for new real estate projects; as rates rise, fewer new projects will be economic, reigning in new investment and slowing spending and inflation – precisely what Fed tightening is supposed to do.

As central governments rein in the printing presses and begin to raise interest rates, cryptocurrencies feel like a less urgent hedge against unchecked monetary policy, and, all else being equal, their prices should decline as well. With a return to market volatility, cash all of a sudden seems like a safe haven, or perhaps a smart asset to hold in reserve for the optionality it affords to be greedy when others are fearful, the corollary to Warren Buffet’s famed advice to “be fearful when others are greedy.” Late last year, Morgan Stanley predicted that cash will be the best performing asset class of 2022. Time will tell.

Inflation changes everything

Up until this point, we’ve been fortunate to live in an era of benign inflation. Only half of Gen X’ers remember inflation, and younger investors have never experienced it. The consequence is that many investors have no muscle memory when it comes to living through inflation. Inflation changes everything: the decision of whether to lease or buy a car or rent or own a home; how to structure your mortgage and how much leverage you should apply; whether to buy in bulk; when to take on that long-awaited renovation project or go on vacation; how to invest for your kids’ education; and where to keep your cash.  

If you have cash sitting in a regular bank or brokerage account, beware: you’ll likely lose real purchasing power every day it sits there. By contrast, interest rates on high-yield savings accounts should adjust to changes in rates much more rapidly. During the last cycle, deposit betas on online savings accounts averaged 0.6 to 0.8, meaning that 60-80% of the Fed’s rate hikes made their way through to depositors almost instantly. Deposit betas on brick-and-mortar bank accounts and brokerage accounts hovered near zero, making them the worst place to keep your cash. 

In a period of prolonged inflation, real property is likely to retain its value while the real value of debt that you must repay in the future declines (making now an opportune time to take out a larger mortgage on your house.) And simple math stipulates that long-term bonds will lose value, while equities generally tend to keep pace with inflation. The S&P 500 has also historically generated a dividend yield hovering around 2%. This means that for many investors, equities can be thought of as part of their income strategy, so long as one has a long enough investment time horizon and the stomach to withstand market volatility.

Inflation will impact corporates in different ways, too.  Many long-term fixed price contracts written over the past few decades when inflation was benign don’t include inflation escalators, whereas it’s relatively easy for producers to adjust prices on consumer staples, which turnover many times a year.

Ultimately, inflation is about expectations. This is one of the reasons why fears of inflation can become self-fulfilling, and why the Fed had no choice but to begin tightening monetary policy to try to reign in expectations. While the precise path of Fed tightening is an unknown, younger investors would be wise to tap on the shoulders of colleagues who have lived through inflationary periods in the U.S. or abroad. With annual inflation exceeding 5%, it’s time to dust off the inflation playbook and position ourselves accordingly.

A prolonged period of inflation could actually be the government’s goal.

(Originally published in WealthManagement.com, November 23, 2021)

For the past 18 months, we’ve heard a consistent refrain from the Federal Reserve: in the wake of the COVID-19 pandemic, our economy needs support in order to meet the twin goals of maximum employment and price stability. This support, we are told, can only come from a combination of monetary stimulus and fiscal policy. However, under Chairman Jerome Powell, the Fed has strayed from its usual practice of seeking to cap inflation at 2%, instead permitting inflation to run hotter than 2% to make up for lost time. With inflation now running in excess of 5%, consumer price increases appear to be more than transitory. Mention of sustained inflationary pressures—throughout the supply chain and migrating into pricing—is a frequent topic on earnings calls. And inflationary expectations themselves can prompt more inflation, as once an inflationary cycle begins it can be difficult to control. Why are we so accommodating? Could it be that a prolonged period of inflation is actually our goal?

In the 1970s, we experienced the most painful of economic conditions: stagflation—the combination of stagnant economic growth and persistently high inflation. Stagflation results from supply shocks, not weakness in aggregate demand. In such an environment, the classical use of monetary policy becomes inappropriate, as boosting demand doesn’t fix supply challenges; rather, it exacerbates them. Similarly, fiscal policy, such as escalated unemployment benefits that provided important relief for struggling families, can also discourage unemployed workers from seeking new jobs, and so our goal of full employment remains out of reach. Under such conditions, the Fed would feel justified in keeping rates low, further fanning the flames of inflation.

One might wonder whether the policy choices promulgated by the Federal Reserve and federal government that are fueling inflation might, in fact, be very much intentional. Might they even be necessary for our survival as a country? Unless we have the political will to cut government spending, which currently exceeds tax revenue by $3 trillion a year, we will continue to run annual deficits that put us deeper in debt to our creditors, to the point where we can’t afford to service our debt in a higher interest rate environment.  

As a country, we’re stuck. We have too much debt and we can’t afford it.  At $29 trillion of national debt (and counting), our debt to GDP ratio is 126%, up from 35% in 1980 and 56% in 2000. And yet we don’t have the will to go on a diet. As a result, our only (and perhaps most rational) way out is to inflate away the real value of our debt. If this were the intent, we would do precisely what we’re doing: align our economic policies in such a manner as to justify turning on the printing presses. Over the past two years, we’ve injected $8 trillion of new money into the economy, through a combination of quantitative easing and fiscal stimulus.

In the process, we have lost sight of the fact that inflation hurts poor people more than it hurts the wealthy, further exacerbating our K-shaped recovery. Affluent investors have exposure to real estate, equities, real assets and crypto, all asset classes that should generally keep pace with inflation. By contrast, less affluent citizens are more likely to rent than own a home, hold non-interest-bearing bank accounts, and have few, if any, investments. Moreover, increases in the price of basic staples such as groceries and gasoline have a much larger proportional impact on the personal income statements of families who are just scraping by. It is no coincidence that so much nominal private wealth has been built up during the pandemic at precisely the same point when so many are suffering and will bear the long-term consequences of having been priced out of the housing market.

If this narrative—that inflation is the solution to our debt problem—holds true, we may be stuck with low nominal rates and high real rates of inflation for a while, at least until we can devalue our currency to the point where we’re back at a sustainable level of debt to GDP. Alternatively, we could cut government spending or further increase taxes, but neither is politically tenable. Investors should tread carefully.

Equities are somewhat capped by historical price-to-earnings ratios, and bonds seemingly have nowhere to go but down: famed investor Paul Tudor Jones recently declared the classic 60/40 portfolio “dead.” Instead, all this excess liquidity is flowing onto bank balance sheets, into real estate, and more recently, imaginary assets like cryptocurrencies and NFTs whose primary value is their scarcity—a key distinguishing factor versus the U.S. dollar, which seems to have unlimited supply.

So, what’s an investor to do? Buy real assets. Residential real estate is as good an asset class as any in an inflationary environment as its nominal value will go up while simultaneously, the real value of the accompanying mortgage will go down. Or traditional gold—it’s down 7% this year because it’s out of fashion, like brown furniture. But it’s a classic inflation hedge and could return as an important store of value. Some cryptocurrencies may continue to perform well too, even though they are fundamentally worthless (in the same way that a painting on canvas is fundamentally worthless, even though through fashion and scarcity it can attract a premium price). Bitcoin’s economic appeal is largely centered around its one feature that the U.S. dollar lacks: limited supply.

Free markets can be remarkably prescient, representing the collective wisdom of thousands of our brightest minds. How can we reconcile a yield curve that suggests that rates will remain low for a long time with the rise of Bitcoin, whose market capitalization of $1.2 trillion suggests that investors expect that we’ll keep printing dollars? Perhaps it’s no coincidence at all. Our government may have rationally concluded that a prolonged period of low rates and high inflation may be our only way out.

Gary Zimmerman is the Managing Partner of Six Trees Capital LLC and Chief Executive Officer of MaxMyInterest, a financial technology company that helps individual investors maximize FDIC insurance coverage and yield on liquid bank deposits. For more information, please visit www.MaxMyInterest.com.

(Originally published in Bond Buyer February 26, 2021)

The Federal Reserve’s response to the COVID-19 pandemic has pushed interest rates to historic lows over the past year.

Changes to the Fed funds target rate and an extensive bond-buying program have driven down rates both at the short and long end of the yield curve. The 10-year Treasury, with a yield that had hovered around 1%, has led to the lowest mortgage rates in memory. A return of the Fed funds overnight rate to a target range of 0 to 25 basis points — a level not seen since the financial crisis — has caused most banks and brokerage firms to cut the rate they pay on cash to as little as 0.01%.

With the Fed targeting an inflation rate of 2%, and with Chairman Jerome Powell’s stated willingness to let inflation exceed that level for a while to make up for past misses, this effectively means that clients sitting on cash are earning a negative real return. And with the average high net worth household keeping 22.1% of its assets in cash, underearning on this asset class can lead to a material drag on overall real returns.

Where are we now?

Historically, financial advisors relied on money market funds to manage idle cash that remains in client portfolios. In the current rate environment, this is no longer a good option for clients. The average government MMF is yielding just 0.02%, so financial advisors who are still using MMFs as a tool for client cash may be relying on outdated advice. Similarly, most brokerage sweeps pay just 0.01%, also not an attractive option. Even the average bank savings account offers a paltry 0.04%, according to the FDIC. Simply put, MMFs and regular savings accounts are no longer delivering a compelling yield. A better solution is needed to keep clients on track.

Broker-dealers aren’t faring much better.

Historically, broker-dealers have made the majority of their profit by putting clients in cash sweep accounts that tend to pay almost nothing, lending out the funds at higher rates, and pocketing the spread for themselves. This little-known fact makes stocks and bonds the red herring of the securities industry — most people assume that brokerages make their money from trading commissions, but, in fact, the majority of their profit is earned from knowingly paying clients too little on their cash.

With yields lower and spreads on cash depressed, they’re still profiting from this practice, but not by nearly as much. It’s possible that a prolonged low-rate environment, coupled with recent penalties from the Securities and Exchange Commission for wealth management firms who haven’t put their clients’ interests first, could lead broker-dealers to re-evaluate whether they ought to make available to their clients better, fiduciary-focused options for cash. After all, cash is the beginning of every wealth management relationship as it is the asset that is safe and liquid — and it is often the case that investment relationships begin when clients determine that they have excess cash that could be better invested for the long-term.

Both monetary and fiscal policy must also be considered.

With the pace at which the U.S. government is printing money, inflation seems all but inevitable. Our national debt has risen by more than 40% in the past four years, and as we begin to recover from the pandemic, inflation could become more apparent in consumer prices.

It is also essential to keep in mind that those who have been fortunate enough to save during the last 12 months are sitting on cash and will be looking to spend or invest it once lockdown protocols ease up. Against that backdrop, cash that’s earning 1 or 2 basis points in a brokerage sweep or MMF is actually losing value each year.

Where do we go from here?

Now would seem to be an opportune time for financial advisors to reconsider how they are talking to their clients about cash.

Many registered investment advisors, who are bound by a fiduciary standard, are beginning to treat cash like any other asset class and are looking to maximize returns for clients.

One of the simplest ways to do this is to turn to more innovative solutions to manage client cash that put clients’ interests first. Run-of-the-mill savings accounts at online banks yield up to 0.50%, while MaxMyInterest helps clients earn yields of up to 0.75% on same-day liquid, FDIC-insured deposits, held directly in the clients’ own name.

It’s no wonder that leading advisor tools such as Orion, Envestnet | MoneyGuide, Morningstar, and Redtail are integrating with better cash solutions that can help clients earn more on cash in their own FDIC-insured accounts.

As advisors seek to find yield for their clients, it may also be appropriate to look at less conventional yield-producing assets that may be less correlated with the market, such as produce anticipation loans, to help clients pick up extra yield.

A barbell strategy of cash plus longer-dated higher-risk assets can help clients pick up yield without sacrificing liquidity.

Many investors have also been seeking yield from dividends on the S&P 500, a trade that worked well in recent years since it offers a 2% yield with plenty of liquidity and a built-in inflation hedge.

However, anything other than cash in a client’s bank account adds risk. Looking at the risk-reward continuum across fixed-income instruments, you’d have to go more than 5 years out on the Treasury curve before you could match the yield available in FDIC-insured savings accounts.

Now is an opportune time for advisors to engage with their clients on the topic of cash and deliver better returns. You just need to know where to look.

(Originally published in Bond Buyer January 7, 2021)

What more is there to say about 2020? It was a year that brought us the worst public health crisis in more than a century, hundreds of thousands of deaths on U.S. soil, and the agony imposed by lost family members, friends, incomes, and our very way of life. Amidst such a profound human toll, it’s difficult to complain much about the damage inflicted upon our economy, but COVID-19 and its economic impacts will be felt for years and — in some cases — for generations, as family businesses were lost, homes were repossessed, careers were derailed, and breadwinners succumbed to a terrible disease.

In 2020 we witnessed significant market volatility and rapid interest rate cuts reminiscent of the financial crisis. Unemployment levels spiked and supply chains were disrupted. Domestic demand fell precipitously in the wake of lockdowns, oil prices cratered, and equity markets plummeted, only to snap back and reach new all-time highs. Bank balance sheets swelled by 20% in a single year – growing by an astounding $2.7 trillion, while the U.S. dollar was devalued, crypto prices reached new highs, and the gamification of stock trading whipped retail investors into a frenzy.

Who would have ever predicted any one of these events, let alone that they would all occur in a span of 12 months?

How did we get here? 
In an effort to stimulate the U.S. economy and counteract the effects of government-induced lockdowns, in March 2020, the Federal Reserve slashed rates twice in rapid succession, reducing the fed funds rate by a total of 150 basis points. In the most recent Federal Open Market Committee meeting, the Fed indicated they would likely keep rates close to zero for the foreseeable future – experts say at least the next year. While the Fed seems unlikely to cut rates further into negative territory — instead suggesting that fiscal policy is the best tool for further stimulating the economy — the yield curve suggests that low rates are here to stay.

Beyond the Fed’s actions, lower consumer spending and a dearth of good lending opportunities for banks have swelled bank balance sheets, putting further downward pressure on rates. This low rate environment has impacted everything from capital investments, interest rates on loans, mortgages, and savings accounts, and equity valuations. Even cash alternatives — such as money market funds (MMFs), have lost their appeal. Leading government MMFs now yield a paltry 0.02%, and brokerage sweeps even less, typically just 0.01%.

Where do we go from here?
An economic recovery will depend on a resolution of the COVID-19 crisis, enabling a restoration of our consumer-driven economy. Such a recovery has the potential to allow a surge in consumer spending as pent-up demand is unleashed, with the beneficiaries being restaurants, entertainment sources, travel-related businesses and locations, and durable goods. Much as the Roaring ‘20s followed the devastation of World War I and the 1918 influenza pandemic, it’s conceivable that a new period of social liberalization and economic excess could emerge by 2022, leading to inflation and a return to higher interest rates.

Those fortunate enough to have entered this crisis with excess cash on the sidelines may have already profited from the opportunity to follow Warren Buffett’s advice and “be greedy while others are fearful.” Others may have taken the opportunity to build up an emergency fund or a cash cushion to help withstand further shocks to the economy, which could still emerge.

For those holding cash, it’s important to make sure it is earning the most yield possible. Even in a low rate environment, it’s possible to eke out excess returns. For instance, while the average rate paid on savings accounts nationwide is a mere 0.05%, online banks are paying 0.40% to 0.50% on the very same FDIC-insured accounts. Online solutions such as MaxMyInterest can help investors proactively manage their cash and secure rates as high as 0.75% on bank accounts that are FDIC-insured and same-day liquid.

While earning an extra 70+ basis points might not seem like a lot, incremental return without incremental risk is the holy grail in finance. In the same way that investors would happily pick an S&P 500 Index fund that had lower fees, they should similarly seek options for their cash that pay higher returns. This may be the simplest and easiest way to pick up “alpha” in this market, with the simplest and most common asset class of all: cash.

As consumer spending picks up, we should see an increase in loan demand and banks’ wiliness to lend, which in turn should lead to an uptick in bank interest rates that may outpace a steepening yield curve. As a result, we expect the interest rates paid on online savings accounts should continue to outperform MMFs while the economy is rebounding.

Although this past year has been turbulent, to say the least, and interest rates appear range-bound, there is light at the end of the tunnel. Smart investors will position their portfolios to prepare for rising rates and ensure that their cash continues to track the highest interest rates in the market, while remaining ever vigilant for signs of inflation that could impact real returns.

If 2020 was a year most would prefer to forget, and 2022 may well be a year we will never forget, we can all hope that 2021 provides a safe and more sure-footed path to recovery.