The big discussion this week — and the reason we’ve seen such a stellar week for stocks — was the decisions of the world’s Central Banks to give free money to Europe. And why not? They’ve been giving free money to US banks for the past few years. And just look how well that’s been working out! Clearly these wise monetary sages know precisely what they’re doing.
But while there’s little doubt the politically-well connected stand to make out like bandits (again), the real concern here is how their reckless moves will impact the little guy…the individual investor. Put simply, it won’t be pretty.
The average saver is already getting crushed. The old saying, “A penny saved is a penny earned,” has gone right out the window. “A penny saved is a penny wasted,” has become the lamentable, modern variation. It doesn’t take a mathematician to realize that rising prices — in everything from groceries to gasoline — are destroying hard-earned savings these days.
Right now, the typical 5-year bank CD pays 1.2%. The average savings account, less than 1%. Even the stock market, with all the volatility and myriad risks therein, disappoints on the income side. The S&P 500, for example, pays just 2% in dividends.
As you can see, it takes a truly unique approach to get anything reasonable. More on that in a minute.
Back to the central banks’ all-you-can-spend money buffet…
Just about everyone that has done the “right” thing over the past several decades and saved what they could is taking an enormous hit because of these central banks’ actions… and not just the most recent move.
In 2008, when the world was burning, they all slashed their target rates to practically nothing. When that didn’t work, they started taking bad bets off bad investors’ (banks) plates. When that didn’t work, they announced a plan to force the backend of the yield curve down. You remember “Operation Twist.”
Now, well, let’s just give it to Europe…they sure could use it. We’ll just print more.
Not once has the thought of 70-plus million baby boomers hitting the retirement age, the flat lining of Social Security benefits through canceled COLA increases or the disappearance of billions of dollars’ worth of home equity throughout the country, crossed any central banker’s mind.
Without this equity in homes, without savings rates high enough to keep pace with retirees’ costs and without an entitlement program that could actually keep retirees from falling under the poverty line, where are these 70 million or so people going to go when they reach the end of their work life? Well, probably back to work, which isn’t such an easy task these days.
I’ve been compiling ways to deal with this myself because you sure can’t leave it to anyone making global monetary policies. What I discovered, however, was way bigger than I ever expected. And right now, precisely because of these poor decisions, the individual investor has an incredible opportunity to get into an often-misunderstood type of investment called “Income Safe IOUs”.
I’ll explain what that means in just a moment. But first, just take a look at this chart:
What you’re looking at is a chart comparing the difference in yields between the average Income Safe IOU and a US Treasury note. Buying a government bond will net you practically nothing. But these IOUs still pay significant income — and the difference is still growing.
With inflation running around 3.5% per year, the bare minimum your investments need to yield is 3.5%. But even with that, which is a tall order from the average dividend payer, you’re not actually making any money. You’re just protecting the buying power of the money you’ve already made.
So when you think about it, you would need a near double-digit rate of return just to make a few bucks. The 2% Treasury note yield just won’t cut it. But a 10% Income Safe IOU would.
Jim Nelsonfor The Daily Reckoning
Jim Nelson is the former editor of Lifetime Income Report. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach.
You didn’t explain what an Income Safe IOU is.
Bob, pay no attention to the man behind the curtain. An Income Safe IOU is what you want. Go buy one.
Free money is great for those of us in the 1%. But the average person……not so much.
Hands off the man
the flim-flam man
his mind is up his sleeve
and his talk is make believe
Where can a member of the 99% go to take advantage of this “Free Money” ????
“Jim Nelson began his investing career during the tech boom at age 14″. That would make him what, 20-something now? Together with a degree in Political Science that sure seems like somebody uniquely qualified to take care of all your money.
Just open a bank, Diane.
You can find some real income (in U.S. Dollars and subject to risk, of course) without the flim-flam.
Let's face it... Gold and silver have had a crappy year. That's actually putting it mildly. In reality, they're on the shortlist for "worst performing assets of the year." But as Greg Guenthner explains, that distinction doesn't plague all precious metals. And that good fortune could carry on through 2014. Read on...
2013 has been one heck of a year for stocks. But with a just a few weeks left in the year, can that momentum continue? Byron King thinks so, and sees 5 opportunities to be thankful for as 2013 comes to a close... and that could carry on into next year. Read on...
Income inequality in the U.S. has reached epic proportions. So much so that "1%" is no longer just a simple fraction. Now it's now much more than that, used as a pejorative symbol of excessive wealth and the greed of the American upper class. Marc Faber explains why this is unfair, especially as regards U.S. tax laws. Read on...
Throughout history, financial markets have been comprised of a series of bubbles and crashes. However, the Fed’s endless policy of easy money has broken the mold when it comes to these financial bubbles. But, as Doug French explains, it seems some investors refuse to learn from the lessons of the past. Read on...
With so much of the national media focused on negative stories, it's easy to feel a bit depressed and to think that the world is hopelessly doomed to failure. But, as Alexander Green points out, there are several things for which humanity, especially in the developed world, should be eternally thankful. Read on...
Remember the Fed's "taper talk"? Well, it's starting to rear it's ugly head again. Of course, as with almost any market trend, it's all about perception. And while some investors may be panicking, Greg Guenthner explains how you can use the current "taper trend" to your advantage. Read on...