How I Learned to Stop Worrying
and Love the Fed By Jeff D. Opdyke, Editor, The Sovereign Individual Dear Sovereign Investor, When everyone else hates, look for the love. This is to say, I have come to see the Federal Reserve's interest-rate policies from a more-charitable viewpoint. It's clear that those of us who play pseudo-economists – and even some real economists – are none too pleased with the idea that the Ben Bernanke's Fed likely won't lift America's near-0% interest rates again until late-2014.
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I feel for retirees like my grandmother and great aunt. They'd love to generate some meaningful income off their savings accounts and CDs. But that's not to be.
Plus, untested experiments in monetary policies have a nasty habit of spiraling out of control. And it is the arrogant American who believes the Fed is powerful enough to contain a political economy as large as capitalism. Soon enough, capitalism does what it naturally wants to do – that is, thrive by righting all the financial wrongs – and the Fed could find itself in a hell of a bind several years out …
But until then, let me tell you why I no longer worry so much about the Fed's policy. The Fed is Propping Up the Stock Market … A theory has been floating around that the U.S. stock market faces tough sledding as retiring Baby Boomers begin to live off their savings. Boomers will, this theory holds, feel compelled to yank dollars out of riskier stocks and shove that money into safer bonds and CDs.
Some will certainly do that. But I have a hunch the Fed is engineering a different road for many retirees – one designed to keep U.S. stock prices elevated as a way to keep the American consumer feeling better off.
And what better way to prop up the stock market than by making fixed income a miserable option?
The Fed, I believe, is trying to funnel retirees and their wealth into stocks.
It would keep the S&P aloft, since the stock market is the only place where savers can find income and yield. Consider that the otherwise tepid 2.2% dividend yield on the S&P 500 decidedly tops a one-year Treasury note (0.11% and heading lower) and even the highest-yielding one-year CD (1.15%, also likely to head lower).
I think Boomers get this. Rather than yanking dollars out of stocks, there's a decent bet that the Boomers – a group that has spent its life in pursuit of gratification – stick with stocks and the income stream they generate … which is good news for the rest of us, since it means Fed policies benefit our portfolios. … And Preventing America from Collapsing Financially A primary cause of America's economic decline is the nation's aggregate financial ignorance. Neither average Americans nor politicians – who are nothing more than average Americans elevated to power by a popularity contest – really understand money. If we did, we wouldn't have a housing crisis built on stupid mortgage and refinancing decisions, and we wouldn't have political spending decisions that disregard the long-term impact on the country's wealth.
Government has $15.3 trillion in debt, not counting the $117.4 trillion in off-balance-sheet debt for entitlement programs, such as Social Security, Medicare and Medicaid, while average Americans owe another $16 trillion in personal debt.
And the point is that neither the government nor the American public can afford rising interest rates. We saw what happened to American homeowners with the brilliant home-financing decisions they made. It won't be any different in Washington.
Rising rates would threaten to thrust America into default or, more likely, a tax-and-print spiral that destroys our collective pocketbooks and kills any stature the dollar might still have.
Total U.S. spending for 2012 is somewhere north of $3.6 trillion. U.S. total interest payments for 2012 are north of $3.7 trillion. When your debt payments alone are larger than the spending needed to run this joint, you've got a problem.
We're borrowing to pay for the interest on our borrowings. It's like using your MasterCard to pay for all the spending and interest on your Amex and Visa.
If borrowing costs escalate, the money it takes to repay all the debt we have as a country and individually will increase dramatically. Just like homeowners struggled to meet rising mortgage payments, the federal government would struggle to meet principal and interest payments and still have enough cash to keep America's lights on.
Politicians would feel compelled to radically raise interest rates, or print more and more dollars – or both – in order to keep the government beast fed. And government, make no mistake, is out to preserve itself first and foremost. You and I are expendable casualties.
By keeping interest rates low, the Fed is essentially buying time – hopeful that America's none-too-swift politicians catch a flippin' clue and find a true and workable solution to America's monolithic debt. Where to Be Invested When the Experiment Ends I'm not saying I'm happy with the reasons the Fed must suppress interest rates. I'm mad that my country is sliding toward banana republic status, all because America is greedy and bloated, and because the political culture is arrogant, ignorant and ruled by small, militant factions of neo-Socialists on one side and neo-conservatives on the other, neither of which speaks for the majority of Americans who are squarely in the middle.
But I do see what the Fed is up to. And it means the U.S. dollar is toast. To protect yourself, and to profit, you have to be outside the greenback, in stronger currencies that will rise as anemic U.S. interest rate keep the dollar suppressed.
I've been spreading my family's wealth among stable economies with strong currencies (think: Denmark, Australia, Canada, Singapore and Hong Kong) and fast-growing economies with emerging currencies (think: China, Indonesia, the Middle East and Africa).
But when my friends ask which one currency they should own, I always tell them the Singapore dollar. It's safe. It's stable. It's managed smartly and proactively. It's tied to one of the soundest economies in Asia. And it's a proxy for the Chinese yuan.
The easiest way to own the Singapore dollar is through a Singapore dollar deposit account at Everbank. You won't earn any interest, but instead will benefit as the Asian currency rises against the greenback over time (Full disclosure: The Sovereign Society has a marketing relationship with Everbank and may benefit if you decide to invest. That said, I only mention investments and companies that I would own or deal with myself.)
Sticking everything you own in America – a slow-growth economy with a weak and declining dollar … well that's as smart as buying a million-dollar home with an interest-only adjustable-rate mortgage and assuming your rich.
Now who would do something that stupid?
Until next time, keep a global view …
Jeff D. Opdyke P.S. Here at The Sovereign Investor, we are constantly on the look out for emerging trends in new places and important, new investment opportunities in places few others are looking. One such opportunity is the advent of digital currency. Our in-depth research reveals this economic phenomenon has created a number of extraordinary investment opportunities. For access to our unique research report, click here. | |
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