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- An Anemic Economic Recovery Keeps the Fed From Focusing on Inflation
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- No Changes to Fed Policy
That's why savings-conscious investors have been forced out into the markets these days in search of higher yields.
Between 10-year notes offering yields under 2% and CD rates hovering near 1%, savers have been left little choice.
It is one of the reasons why high-paying dividend stocks have been in demand ever since the ZIRP crisis began.
For savvy investors looking to boost their yield, there's only one place to look...
They're called mortgage REITs, and they offer investors the chance to collect some of the highest dividend yields available today.
In fact, one of these investments is actually paying a 19% yield, right now!
That's not a typo. Double-digit yields like those really can be found if you know where to look for them.
I'll tell you more about this company in a moment. But first I'd like to explain to you what mortgage REITs are all about.
Mortgage REITs ExplainedReal Estate Investment Trusts, or REITs, came into existence because of U.S. President Dwight Eisenhower's "Cigar Tax Excise Tax Extension" of 1960. Under this initially obscure tax provision, REITs can avoid corporate income tax, provided they invest in real estate-related assets and pay out at least 90% of their income in dividends to investors.
Mortgage REITs, as their name suggests, invest in residential and commercial mortgages.
Within the residential mortgage REIT category, some invest in agency-guaranteed REITs while others specialize in REITs that are not guaranteed.
Given the recent default rate on home mortgages, investors would be wise to concentrate on guaranteed agency mortgage REITs. This is due in part to Ben Bernanke's monetary policy since 2008.
Let me explain...
Anyone who watched or listened to Bernanke's Oct. 4 congressional testimony must have reached the same conclusion.
"Persistent factors continue to restrain the pace of recovery," Bernanke said. Then the Fed Chairman promised to consider yet more stimulus "to promote a stronger economic recovery in a context of price stability."
The irony, of course, is that we don't actually have price stability, but Bernanke refuses to believe this - thus the added stimulus. And that says nothing of the fact that the first $2 trillion of "stimulus" did little or nothing for the overall economy.
This is the same kind of delusion that led the Fed Chairman to proclaim in 2007 that the "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
So, with a delusional central bank chairman, an anemic economic recovery, and every indication that prices across the board will continue to soar higher, there's really only one place to put any loose change you have lying around: gold and silver.
Bernanke's BlunderBack in May, I said gold and commodity investments were attractive for two primary reasons:
- First, global monetary policy was - and still is - very stimulative. Commodities, especially gold, tend to do very well when interest rates are well below inflation.
- Second, rapid growth in emerging markets has created a new wave of middle class consumers. Those new buyers are increasing demand - and therefore prices - for industrial commodities.
On the other hand, monetary policy has gone in the opposite direction - becoming even more stimulative. Bernanke intends to keep short-term interest rates near zero until mid-2013 and he's undertaken a $400 billion "Operation Twist" program to bring down long-term interest rates. Both of these measures have increased monetary stimulus at a time when inflation is already running close to 4%.
That brings us to this week, when Bernanke decried the progress in the economy and indicated that the Federal Open Market Committee (FOMC) would consider even more monetary stimulus - even though three of the group's members are solidly opposed to the idea.
$5,000 Gold - $150 SilverSo far the only thing the Fed's loose monetary policy has succeeded at doing is pushing gold and silver prices steadily higher.
Fed Chairman Ben S. Bernanke has indicated that he does not intend to carry out a follow-up "QE3" program.
But here's the reality: The U.S. federal deficit is running at about $1.6 trillion, meaning we need to sell a lot of Treasury bonds to finance the shortfall. So if the Treasury-bond market gets a case of "indigestion" - meaning there aren't enough buyers to fulfill our massive financing needs - many folks believe that Bernanke will have to step in with the-much-talked-about "QE3" bond-buying program.
But Ben, please be forewarned: If you do this, our future is clear ...
A Glimpse of Our FutureThe year is 2015, and it's late in the month of June. Central bank policymakers have been meeting for two days. Now it's late in the afternoon of that second day, and Bernanke's traditional press conference is set to start at any moment. Investors the world over have stopped everything to hear what the U.S Fed leader has to say.
Bernanke is still not the longest-serving Fed chairman: With only nine years under his belt, he has a decade to go before he'd have more service time than predecessor Alan Greenspan, or the legendary William McChesney Martin.
But as Fed chairmen go, Bernanke is uniquely powerful - perhaps even more so today than he was back in 2011. We all know that he won't change interest rates, which have now been held in a target range of 0.00% to 0.25% for nearly seven years. The real question - and the reason we're waiting for the press conference to start - is whether the former Princeton economist will indulge the financial markets with a further round of quantitative easing.
This round of Treasury bond purchases would be "QE17" - but these days, nobody's counting.
Indeed, the economic reports of the last week or so demonstrate that the U.S. job machine was never really jump-started after the Great Recession of 2008-09.
The upshot: The U.S. economic recovery is stalling, and we're almost certainly looking at a double-dip downturn.
Recessions are always painful - and double-dip recessions are even more so.
And this second "dip" may be more of the same - a bloody economic downturn that leads into a feeble recovery with unemployment spiking to even higher levels than we're currently seeing.
But there's a slight chance that this double-dip recession could prove quite productive for the U.S economy.
Let me explain.
Start the conversation
Friday and Monday the market has a big pile of new paper to settle. We have to wonder whether having spent every last penny they had in propping things up earlier in the week, the dealers have anything left come Monday. The markets "should" sell off, if not today, then Monday.
The indirect bid at the auctions continues to weaken, suggesting that foreign central bank (FCB) players continue to withdraw from the game, but the Fed's custodial data on FCB holdings went the other way, showing an explosion of FCB buying the prior week.
In particular, I zeroed in on the part about the policymaking Federal Open Market Committee (FOMC) regularly reviewing "the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability."
Stocks rattled around in 295-point range of the Dow Jones Industrial Average over the past five days like pebbles in a maraca, but ended quietly -- a fraction above flat. The big-cap indexes have now posted six of their past seven closes within half a percent, hemmed in by some sort of spooky gravitational pull.
Earnings came in quite a bit better than expected for most major companies, as the cheap dollar has helped overseas sales for Caterpillar Inc. (NYSE: CAT) and McDonald's Corp (NYSE: MCD). Over in the exciting web content space, Netflix Inc. (Nasdaq: NFLX) wowed the crowd with outstanding third-quarter results, logging a sales increase of 31.0% and adding 1.9 million net new customers. That's a lot of new buyers in an economic environment that is supposed to be so terrible that the Federal Reserve thinks unprecedented medicine is required.
However, Analysts think the Fed will have to do more to help the economy move along, and are expecting more announcements of policy easing in coming weeks.
"I suspect that the Fed will, within time, purchase more longer-dated government securities" than is required by reinvesting the principal payments from agency debt and agency mortgage-backed securities in the Fed's portfolio, said veteran Wall Street economist Henry Kaufman to Reuters.
In case you missed the news, here's what happened...
The Federal Reserve on Tuesday announced that instead of allowing proceeds from maturing mortgage bonds to disappear from its balance sheet, the central bank would take the "modest" step of using them to invest in new Treasuries.
In plain English, that means that the Fed is reinvesting into U.S. Treasuries the money it would otherwise bank from maturing mortgages.
Its goal is very simple: to keep long term interest rates from rising.
The central bank yesterday (Tuesday) announced that it would reinvest the proceeds from expiring mortgage-backed securities into longer-term U.S. Treasuries. The move should help a weakening economy by keeping mortgage rates low. And while it also may boost inflationary pressures, the central bank feels it had little choice.
"Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months," the Federal Open Market Committee said.
Stocks launched higher last week in another round of the hyper-volatile action that has plagued the equity markets over the last three months. The good news is that some technical resistance was knocked out in the process, potentially setting the stage for a bigger rally in weeks to come.
The not-so-great reality: Stocks remain mired in the same range that has boxed them in for the past three months because, let's face it, despite their strong move they really only ended the week a fraction above where they started the previous week.
Let me explain ...
Last week, I provided a solid "defensive-investing" pick for readers who wanted to balance their portfolios - and wait for the latest global-financial storm to pass.
During the past week, we got very strong indications that strong hands see value in the market: