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Federal Reserve Chairman Jerome Powell on Wednesday promised Congress that the central bank would lower its key rate target for federal funds, starting with a quarter point cut, likely by the end of the month. . He admitted that the economy was already "in a good position", which is perhaps a euphemism, with its record expansion starting in its eleventh year, its unemployment rate at its lowest level since a half century, its major stock market averages to record highs and its biggest problem being inflation below the Fed's 2% target. A reduction would reduce the bank's policy rate, which was currently between 2.25% and 2.50%, barely an exalted level.
But before Powell's mid-week trip to Capitol Hill, the letter from Mark Grant's out of the box newspaper, chief fixed income strategist at B. Riley FBR, drew more than his usual attention from his public of elite investors. Grant said that where security forces were once dominant, central banks became "the force" on the market. That generated $ 13 trillion in negative yield bonds, unprecedented in history, and $ 25 trillion in less productive bonds than inflation.
And despite the "hype" about independent central banks, they are at the service of the governments that created them. They therefore print money to reduce borrowing costs to help finance budgets and social programs without the inconvenience of taxes. Central bankers are the only ones in the world not to go to jail for creating money.
Bond yields will remain low because of this "government intervention of unprecedented magnitude in history," Grant says. Decrypt this state of affairs, but all you can do is play and try to advance what the central banks will do next. The game is rigged, and this since the financial crisis, he concludes.
Borrowers whose debts cost nothing or less can benefit, but savers, especially pension funds and endowments, suffer, he says. They find that it is impossible to face future bonds with negative yield bonds, especially when they have assumed that their assets would generate annual returns of 7.5%. This will force their free money into risky assets, including real estate and equities.
Such thoughts may not be unique or new, but few are ready to express them. And fewer of those who express these opinions occupy the world of Wall Street, where fortunes are supposed to benefit the best and the brightest.
But the reality is that investors are surfing on the tsunami created by central banks. Of course, you need wealth to play this rigged game of inflation by assets. Those who do not play are left behind, which widens the already glaring gap of inequality. As Hyman Roth has pointed out in The godfather: part 2, This is the job we chose. It is up to investors to take care of this rigged game, whether they want it or not.
Grant plays the game for his institutional investor clients, both in defense and in attack. (Because of the rules of compliance, he can not identify his choices.) For the defensive team, he sticks to corporate bonds in the investment category of 5 to 10 years. Not too exciting, but they report about 4.25%. Grant buys individual bonds selling just below par, so investors can be assured of recovering their face value at maturity.
In attack, Grant favors a range of closed-end funds (again, he will not name names) that report north 10% per annum, with dividends paid monthly. These payments give rise to a significant increase in returns if they are reinvested or to a regular income for investors who wish to do so.
The high returns – and much of the risk – of these funds lie in their leverage. But the Fed almost assured the markets that it would lower rates in the near term, which would significantly reduce the risk of higher costs of liability. Of course, the underlying assets of the funds could lose value in a bear market. And nobody realizes double-digit returns without risk.
Nevertheless, more than a number of current and retired professionals report having some of these high-performing CEFs in their personal portfolios. And these yields do not have to come from bonds that, as this column said last week, are richly valued.
Some of the most interesting names:
Tekla World Healthcare (symbol: THW), which represents an irrelevant group in the bull market. It yields 10.89% and is trading at a 7.90% reduction in net asset value, according to the closing on Thursday, according to CEFConnect.
Gamco Global Gold Trust, Natural Resources & Income (GGN), another group lagging behind until the recent resurgence of gold by the relaxation of the central bank. Unlike metal, the CEF gives 12.99%, but exchanges at a premium of 3.13% compared to the net asset value.
Cohen & Steers MLP's Income and Energy Opportunity (MIE), representing another late group, but with a return of 9.43%. It is trading at a discount of 4.59%.
AGIC Convertible & Income (NCV) was fundamentally lateral during this year's rally, as its premium to net asset value fell to 1.97%. It gives 11.09%.
Voya Global Equity Dividend and Premium Opportunity (IGD) offers exposure to global blue chips, complemented by options strategies. It offers a return of 11.32% while trading at a discount of 6.74%.
Grant seeks a return of approximately 7.5% relative to its strategy, evenly split between prime blue-chip bonds and double-digit closed-cap securities. That would be roughly equivalent to the
S & P 500 Index,
which has just hit 3000, reaching 3500 in a few years. And that seems like an easier way to play a rigged game.
Write to Randall W. Forsyth at [email protected]
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