Taking Advantage of the Fed's All-You-Can-Spend Buffet

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:

Income Safe IOUs vs. US Treasury Notes

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 Nelson
for The Daily Reckoning