Addison Wiggin – June 9, 2011
- The destruction of the boomers’ retirement in three easy steps, and how step three is starting now
- How to find yield in an era of super-low interest rates without extra risk or leverage
- Oil above $100 again as OPEC meeting ends in squabbling, confirms our toothless tiger thesis
- The Bitcoin phenomenon… and Congress’ ham-fisted attempts to rein it in
- Reader asks if we’re disingenuous or merely clueless… and other treats in the mailbag
Whatever is left of the baby boom generation’s retirement is about to get wiped out. It’s the third and final step in the systematic destruction of a whole generation’s wealth.
OK, bold statement… we agree. But hear us out.
The first step came with the dot-com crash. Retirement accounts stuffed with tech stocks pumped by CNBC — or funds that bought tech stocks pumped by CNBC — were vaporized.
Boomers picked themselves up, dusted themselves off and a few years later they figured they were riding high again. Yes, their retirement accounts were a shadow of their former selves… but their homes were rising in value 10% a year, every year. So who complained?
Phase 2. Federal Reserve Chairman Alan Greenspan encouraged folks to load up on ARMs. His successor Ben Bernanke assured them there’d never been a sustained nationwide drop in home prices.
Bummer. We know how this one ended, too.
In their effort to “chase yield,” bankers on Wall Street created the Frankenstein known as mortgage-backed securities (MBS) and went on to insure them with the abominable credit default swap (CDS). That derivative stew poisoned the entire global financial system…
Now comes Phase 3. Baby boomers are approaching retirement age. What are you supposed to do with whatever wealth you have remaining? Why, unless you’re a speculator in stocks and commodities and willing to bet on monetary policy outcomes… you’re supposed to play it safe with fixed income, of course — first and foremost with U.S. Treasuries.
A 10-year U.S. Treasury note yields a paltry 2.95% this morning. Consumer prices, even using the government’s heavily gamed figures, grew 3.1% over the last 12 months.
In other words, if you lend your money to Uncle Sam in “safe” Treasuries, you lose all of your yield, and a bit of your principal, to inflation. It’s even worse if you opt for a savings vehicle like a bank CD. The best rate we find for a 5-year CD on the Internet this morning is 2.41%.
This is no accident. It’s policy. Even if, in the end, we discover it’s accidental policy. “Negative real interest rates” are how the federal government will try to pay down some of its staggering debt.
This puts income investors in a real pickle. Sure, they could turn to a corporate bond fund… but how wise is that when the economy is slowing and profits are bound to come in below Wall Street’s lofty expectations?
Of course, there are municipal bonds, and the tax advantages they bring. But at a time when municipal budgets are strained and whole cities in California are filing for bankruptcy… how “safe” is that?
Income investors need to throw out the traditional playbook… and pursue alternative income strategies.
For instance, did you know you could take a humble corporate bond yielding 7%… collect a yield of 10%… and cash out a 73% gain? And all without adding risk or leverage?
“Let’s say Company X is expanding its business,” says our income specialist Jim Nelson. “It plans to open 10 new retail stores for its widgets in the coming few years. To do so, it issues 5-year bonds, also called notes, with a 7% coupon rate.
“After the second year, the widget industry enters into a downturn. Sales growth slows, but the company is still cashing in steady cash flows. Since investors are worried about the company’s top line, they sell their bonds. Prices fall from their $1,000 par value to $700. This is where we step in.
“We run the math and discover that even with a business slowdown, the company will still be able to pay off its bondholders. With the recent sell-off, we are able to lock in an even-lower bond price.
“At $700, that 7% coupon rate actually pays 10% ($70 annual interest/$700 investment). Plus, in just three years, we’ll receive the full redemption price of $1,000.
“Paying semiannually, we’ll receive six $35 interest payments… totaling $210 for the three-year period. That brings our total return to $510. We put down only $700. So in three years, we cash in a 73% gain… or 24% annually.”
Your broker won’t tell you about this strategy… because there’s little in the way of fees to collect.
Here’s another tack, albeit one of the more aggressive strategies we’ve mentioned here in The 5: This one allows you to double or triple your stock dividends, again without adding risk or leverage. It involves three steps that Jim lays out as follows:
- STEP #1: You buy a stock…(or you can do this with stocks you already own)…
- STEP #2: A speculator pays you an upfront fee for the future option of purchasing your stock at a higher price than you paid for it.
- STEP #3: You pocket that fee (called a premium) and sit on your shares like you normally do. You NEVER have to pay this fee back — no matter where the stock goes in the future. It’s yours to keep…forever.
Following this strategy, Jim recently unearthed a play that can deliver a 19% yield. “That’s even better than the most bullish investors shoot for — and they trade risky plays.” Jim is looking among the safest blue chips in the market.
Granted, these sorts of plays aren’t for everyone. Investors who are lazy or don’t want to try something new will cringe at the latter… Meanwhile, many corporate bonds require a minimum investment of $5,000.
But for a certain kind of income investor, these plays are ideal… which is why we’re launching a new high-end service called Total Income Investor. We’ll make it available to the general public later this year. Members of the Agora Financial Reserve already have access.
“Yahoo!” wrote one contented Reserve member. “It’s about time Agora got something going along this line! This is great. Best of luck, and I’m looking forward to it.”
[Ed note. The Agora Financial Reserve, as you may know, gives you access to every one of our investment newsletters, premium microcap advisories and trading services — all for a low one-time fee that gives you lifetime access.
One of the major pluses of membership is that you get to test drive every new service we offer before we make it available to anyone else. This is how we launched “soft launched” Strategic Currency Trader last year.
Reserve members had full access to Abe Cofnas’ plays months before the general public… and it paid off with gains as high as 1,329% in only four days.
Membership comes with a host of other privileges, including free annual admission to the Agora Financial Investment Symposium in Vancouver — where you can talk with our editors face to face and hear from an outstanding lineup of guest speakers.
We make membership available at most twice a year. And because many of the plays can handle only a limited number of investors, we always cap these membership drives at 1% of our existing readers.
The doors to the Reserve are open for the next week. Your invitation is here. Please bear in mind that once the doors close next Thursday, we likely won’t reopen them until next December — at the earliest.]
After six down days to begin the month — the last time that happened was in the dark days of October 2008 — U.S. stocks are rallying. The S&P is up 0.75%, to nearly 1,290.
Traders seem to like this morning’s report on the U.S. trade deficit, which narrowed 6.7% from March to April — never mind that most of that can be chalked up to an earthquake and tsunami that crippled Japan’s exports.
Precious metals are quiet. Spot gold is at $1,539, and silver has once again pushed above $37.
The greenback is strengthening after both the Bank of England and European Central Bank decided earlier today to stand pat on interest rates. The dollar index is up to nearly 74.2.
Crude is up again… a barrel of West Texas Intermediate is currently $101.61. Oil instantly zoomed past $100 yesterday after the OPEC conference in Vienna collapsed like a Bedouin tent in a sandstorm.
For the first time, the ministers failed to agree on a course of action. Iranian leaders, who earlier in the week looked as if they’d go along with Saudi Arabia’s desire to raise production, changed their minds at the last minute.
Now there’s talk that the Saudis, egged on no doubt by their patrons in Washington, will opt to ignore OPEC production quotas.
To which we say, good luck. No less than the head of Saudi Aramco, the state-owned oil company, said recently that at the current growth rate, Saudi Arabia’s own oil consumption will grow to 8.3 million barrels a day over the next 17 years.
Saudi Arabia can barely produce 9 million barrels a day now.
As we said on Tuesday, OPEC is quickly becoming a toothless tiger, no longer able to boost or suppress oil prices at will. Which opens up some remarkable investing opportunities. For one that has us especially excited, look here.
Leave it to members of Congress to muck up something they don’t even understand. Heh. In this case, we’re referring to a net phenomenon known as Bitcoin.
Bitcoin is a form of currency people use online to buy and sell goods. It’s ingeniously designed with cryptography and peer-to-peer networking to ensure it can’t be counterfeited or inflated into worthlessness. (If you didn’t catch Joel Bowman’s write-up last week at The Daily Reckoning about Bitcoin, we suggest you do so here.)
To us, it sounds like a fine free-market experiment will succeed or fail on its merits. But to Sen. Charles Schumer (D-N.Y.), “It’s an online form of money laundering.”
Schumer has his knickers in a wad because it appears some people are using Bitcoins to buy illegal drugs. He’s demanding the Justice Department shut down Silk Road, an outfit that sells drugs for convenient home delivery. The site is accessible only with software that masks your IP address, and transactions are carried out only with Bitcoins.
“Could’ve seen this coming a mile away,” says a note from Joel this morning. “There’s a lot of conjecture in the Bitcoin forums about whether the Feds can actually do anything… even if they want to.
“Interestingly enough, the entertainment industry has poured billions into shuttering BitTorrent, a file-sharing concept for movies and music with similar technology… with limited or no success.
“Like one hacker said of the bumbling feds, ’They still don’t know what Twitter is. By the time they figure this out, it will have already taken hold.’”
Now that it has Congress’ attention, Bitcoins are becoming more valuable. A couple of weeks ago, one Bitcoin was worth US$7.50. This morning, $31.50.
“I can’t figure out if Addison Wiggin just doesn’t understand the issues he writes about,” responds a reader on our Forbes.com blog (the post attempted to catalogue our search for a catalyst to the new crisis last week), “or he is deliberately shilling for the big banks and the elites who really run this country.”
[Oy, here we go…]
“The U.S. federal government is drowning in debt not because the American people demanded it. They are drowning in debt because our monetary system, divorced from any kind of sound money, permits an incestuous relationship between the Federal Reserve Bank, the member banks, the whole banking system and the U.S. government, and it works to the great profit of the biggest banks and corporations. It also gets congressmen and presidents elected.
“The suggestion that the solution lies in shrinking ’unproductive government assets’ so that the miracle of ’investment in job creating entrepreneurial efforts’ can occur without reform of the monetary system and financial industry is pure hokum.
“The banks and the elite have control of almost everything: money, assets, government, the news media… It’s perfect, except this perfect world (for the elite) has no use for entrepreneurship. So at this point, cutting government will accomplish nothing, except to further bleed whatever wealth is left in the hands of the middle class and the poor.
“It’s like medieval times again, where the elite have no incentive to innovate, because they have all the control as it is. Innovation and creative destruction are the hallmarks of a free society (which we no longer have), but they are anathema to an entrenched elite.”
The 5: Amen. You’re suggesting either we reform the monetary system or it will melt down. We agree. A meltdown of municipal and state governments, we believe, is a symptom of and will precede the former.
That hardly makes us shills for banks.
If anything, innovation and entrepreneurship are the only way out of this mess. They are, as you point out, “anathema to an entrenched elite” and always have been. Indeed, this is the challenge of our time, isn’t it?
“If we quit worrying about the Fed and concentrate on the real problem with the economy,” writes another, who apparently disagrees and has solved the world’s problems already on paper: “It’s Housing, Stupid!
“Housing is moribund. It currently contributes only about half of what it did before to GDP. Unemployment in construction is above 20%. We are talking about losing something in the range of $700 billion-1.2 trillion of direct contribution to the GDP, not to mention the multiplier effect as it rolls through the economy.
“Fix housing. Freddie Mac and Fannie Mae are not in trouble because of their structure or financial underpinning, but rather because of perverse incentives to senior managers, resulting in gutting of underwriting criteria and the purchase or guaranteeing of bad loans. Get rid of the bad loans to a recapitalized and reactivated Resolution Trust Corp., and recapitalized Fannie and Freddie. Restore interest rates and underwriting requirements to what we know will produce sustainable results.
“Working through an RTC will help to get houses sold, which will help stimulate the market. The last time the RTC managed to move all the real estate they received in faster-than-expected turnarounds while not dragging down pricing in affected localities helped keep prices up and state and local tax revenues up.
“A targeted stimulus at housing sufficiently large to accomplish the job, which means another $1 trillion, and reconstitution of the regulatory system for mortgage investment…
“Enough said: Fix housing and the economy will recover. Continue to ignore it and the economy will continue to sputter for at least two more years. I’ve seen predictions for a housing recovery for spring of next year. That won’t happen if the mortgage supply system isn’t fixed.”
The 5: We’re always suspicious, even of literate writers, who end their points with “enough said.” Why do that?
“Where can I get the video of I.O.U.S.A.? I watched it when it came out and was deeply moved. I want it to show my kids when they ask how things got all ****ed up.”
The 5: Why, at the Laissez Faire Bookstore, of course. Take a look, here.
“How about changing The 5 Min. ‘clock’ color to the Green Lantern shade! It glows in the dark times of this economy… and the hard times that are here to stay!”
The 5: We haven’t seen the movie yet, but as you can see, we’ve had our designer work up a beta model to humor you for the day. Thanks for the suggestion.
The 5 Min. Forecast
P.S. “How about explaining in layman’s terms,” one more reader writes, “what is ’financial repression’ and who was the mastermind behind this sneaky way to share the debt with everybody and with the investors, etc., etc., since you are good at writing! I would like to read it in the near future!”
The 5: There are several elements to “financial repression” as defined by economists, but at the base of all of it is negative interest rates.
“It means,” Pimco’s Mohamed el-Erian explained in a missive last month, “that the government ends up paying savers less than the rate of inflation and slowly overcomes its debt issues by recapitalizing because it’s paying in negative real return.
“We have seen this happen in the past,” el-Erian added, “and I suspect it will be attempted in the next three-five years.”
Income investors will need far-different solutions over the next five years than the typical mix of Treasuries, corporates and munis. They’ll need the strategies outlined in Jim Nelson’s Total Income Investor — currently available only to Agora Financial Reserve members.
We open Reserve membership only once a year, twice at most. The doors close one week from today… so please, review the privileges and benefits of membership now while you’re thinking about it.
It took 462 miles of driving around Florida for Patrick Cox to make the discovery that has him more excited than at any time in the four years we’ve known him.
First was a road trip to dinner with a scientist/CEO who made some extraordinary claims: He’d discovered a “nutraceutical” — a compound not subject to the usual FDA regulations that controls the inflammation that many doctors now believe is behind everything from cancer to Alzheimer’s disease.
“At that point, I was smiling politely and listening,” says Patrick. “He wasn’t lying, I figured. He was just wrong.”
But Patrick’s curiosity was piqued — enough to make another road trip to company headquarters. “Come up and see the lab,” the CEO said, “talk to the scientists.”
He did. And he was convinced… enough that he spoke last weekend at a conference in Sarasota, Fla., to 125 scientists, money managers and fund managers, even the wife of Virginia’s governor — who’s interested in bringing down the health care costs of state employees.
Events are starting to move very fast with this company. But it’s still a ground-floor opportunity. Patrick believes passionately this could be “the last stock you ever need.” It would be like buying Teva Pharmaceuticals in 1990 for 52 cents… and holding on till $61.85 last year. That’s an 11,800% gain.
Given recent events with this firm, we’ve reopened discounted access to Patrick’s Breakthrough Technology Alert — but only through midnight tonight. Act now.