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In This Issue
Low Rates and Savers
History Speaks
Chart of the Month
Asset Class Returns
Market Commentary
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IHA MonthlyTop
March 2013
InnerHarbor Advisors, LLC is a private Financial Planning firm based in New York City founded by Michael J. Keating and John O'Meara. We are expert financial advocates your family can trust. 
Financial Planning Highlight
Saving in a Low Interest Enviornment
History Speaks
Be Careful of What You Wish For
This month we focus on the low interest rate environment engineered by the Federal Reserve's monthly purchase of $85 billion of bonds from Wall Street banks. This is a long trip for an institution  founded- in many ways- to limit the power of the New York banks. 
Virginia representative Carter Glass was co-sponsor of the bill that established the Federal Reserve system 100 years ago. Glass was part of a Southern, rural and Democratic party tradition of distrust toward Wall Street and large banks. This tradition stretched all the way back to Thomas Jefferson's feuds
Rep. Carter Glass
with Alexander Hamilton. Rep. Glass approached newly elected President Woodrow Wilson with a plan to create a set of regional reserve banks to hold the local banking reserves. At the time the U.S. had a large number of small banks in every area of the country, but the lack of larger local banks meant the reserves of these smaller banks found their way to a cabal of New York financial institutions (the 'money trust' in the parlance of the day). Representative Glass hoped to break up the money trust and for a while thought he had a receptive audience in the incoming President. But in true progressive fashion, President Wilson thought it best if the entire banking system was headed by an "altruistic body" to regulate and to direct policy. Representative Glass was a vocal opponent of this idea- one which he thought would favor Wall Street banks. (He was right as the New York banks wanted a central institution large enough to provide liquidity in times of panic). Nevertheless, the 1913 bill sponsored by Rep. Glass included that altruistic body- known today as the Federal Reserve Board- now the most powerful bank in the world. Somehow we doubt Mr. Glass would take much satisfaction knowing his creation is based in Washington D.C. instead of New York.
Chart of the Month
Paying The Price For Low Interest Rates
From the St. Louis Federal Reseve Bank site, a chart illustrating the loss of income to savers a a result of low interest rates. 
Asset Class Returns
Through February 28th, 2013

Returns assume dividend reinvestment and do not include any types of management fees, transaction costs or expenses. 




March Commentary


The S&P 500 continued rising in February, extending the gain since mid-November to over 15%. The primary driver of this rally is the massive bond purchases- currently at the rate of $85 billion a month-  the Federal Reserve has committed taxpayers to. Nope, the Fed does not purchase equities directly but their aim in keeping interest rates low is to discourage passive saving by individuals, and encourage riskier investing- stocks, real estate etc. The Fed has been successful the last couple months as evidenced by both the rally in equities and the relative quiescence in interest rates which otherwise expected to rise sharply in the face of a strong stock market. The following chart of 10 year Treasury rates show that while rates have risen from their nadir last summer they are still well below their highs of the past 12 months:


More risky bonds have seen even less of a rise in yields since the rally got going, as this graph of BBB rated corporate bond yields demonstrates.


This ideal world ("Goldilocks" anyone??) of rising markets and restrained bond yields is also evidenced by flow of funds data from the Investment Company Institute that show that money flowing into equity funds has not been coming from bond funds but more from money market funds. 


Of course there is wonderment of how long this market nirvana can last. While economic data in the U.S. has been relatively strong (including today's employment report), the market is clearly discounting even faster growth - potentially setting itself up for disappointment. In addition, while there has been a well documented gusher of central bank liquidity over the last few months, there is still little evidence that growth is accelerating anywhere outside the U.S. Perhaps the biggest fear for investors is that growth will accelerate above its current very moderate pace. If this happens, it poses two big questions:
1) Can the Fed can continue to grow its balance sheet by $85 billion a month?
2) When will they start withdrawing the liquidity they've pumped into markets since 2007?
Such are the costs and risks of central bank intervention at the scale we are witnessing.



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InnerHarbor Advisors, LLC
420 Lexington Ave, NYC 10170
Managing Partners:
John O'Meara, CFP, M.S.    
Michael J. Keating, CFP

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