Fixed Income May Not Be A Viable Path Anymore

Rodney Johnson | Wednesday, October 31, 2012 >>

There is an old story about how much Michael Jordan made as a basketball player… it was something like $80,000 per minute of play.

His rewards for “simply” playing a game were put in terms to make them seem like the stuff of legend. The story ended by pointing out that if Michael Jordan wanted to have as much money as Bill Gates, he’d have to work for over 200 years.

The moral of the story? Geeks win.

But while this might be true for personal fortunes, it cannot be said for power.

Goldman Sachs and JP Morgan control hundreds of billions of dollars. Apple is worth over $600 billion and brings in cash by the wheelbarrow full. But none of them are the mightiest wielder of power. Instead, that honor goes to a geek in the government… a guy who gets to take billions – even trillions – of dollars when the urge strikes.

There is no winning a fight against a guy with a money press.

The solution…

Don’t play the game.

Conservative investors are square in the Fed’s crosshairs. These investors save their money (strike number one), buy fixed income investments (strike two), and don’t react to government intervention (strike three, you’re out!).

So the Fed uses a combination of money creation, which drains value through depreciation of the currency, and financial repression, by artificially lowering interest rates to levels below inflation, to ensure losses for all but the longest or riskiest fixed-income buyer.

Between these two programs the Fed is able to comfortably take from conservative investors what they were not willing to give up: their purchasing power. This power is handed to banks in the hopes that they will lend it out, creating a multiplier effect in the economy.

Of course it’s not working… but that’s not the point.

The part of the program that IS working is the loss of value for conservative investors, which means they must find a different game…

If this particular investment path – traditional fixed income – is racking up losses through negative real interest rates (earning less than inflation), then we must choose a new path.

Remember the definition of insanity – doing the same thing over and over, but expecting a different result. Well, it’s time to broaden your horizons a little. Don’t think of it as fixed income investing. Think of it as a treasure hunt for yield.

For years we’ve prompted readers to search a little farther afield for yield. It can take many forms, well beyond the interest on a bond. Dividend stocks are a good starting point, but they are not for the faint of heart.

Yield is an area that has gotten a lot of interest in the past couple of years so many people now fish in the same ponds. Regardless, the goal is to double-up, or to buy securities that have the opportunity for both capital gains in the Fed-driven market and the ability to pay cold, hard cash along the way.

If you can do that, then not only have you left behind a losing game of low yields on traditional fixed income, but you’ve also turned the Fed’s game on its head. You can earn the return you want and still put the money in your account instead of spending it.

That sounds like winning to me.


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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.