About That Rate Cut

I was appointed the finance correspondent for Senior Life Advisor, an online magazine for investors near or in retirement. The articles for Senior Life Advisor were designed to offer actionable information as well as items of interest about economics, investing and personal finance.

The Fed rate cut to near zero percent was a good move, right?  On the positive side it decreases the cost of borrowing for the federal government.  And with nearly $20 trillion in debt, lower borrowing costs help all taxpayers.  

But lower rates are a double edge sword.  They can make borrowing more attractive by making it less expensive, but they can’t necessarily overcome borrowers fears of taking on more debt at such an uncertain time.  As economists like to say, “You can’t push a string.” 

Another ill effect is low rates put pressure on bank earnings.  Lower rates mean banks earn less on the loans they make.  How tuned in are investors to the likelihood of lower bank earnings in the future?  Very.  

Morgan Stanley, Goldman Sachs, Citigroup and Wells Fargo are actually trading at less [italicize less] than their book value.  What does that mean?  That the banks are valued at less than the cash that could be raised by liquidating them.  When there’s a difference in the price of the same asset, traders call it an arbitrage opportunity.  Though bank stocks look cheap when measured by their book value, they may get even cheaper after investors digest the next set of headlines.

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