The Fed Is Trapped

The Fed is trapped by the threat of economic collapse

I have to admit, I have a problem.

It’s about my 2-year-old daughter.

Her favorite food for breakfast, lunch and dinner is a cookie. It was practically her first word, and it’s the first thing she asks for each morning. Clearly, this isn’t healthy.

Fortunately, I have a 6-year-old son who figured out how to outsmart her. He still gives her a cookie, but he calls a plain cracker a cookie — and it actually works.

But the problem with tricking my 2-year-old into thinking she is getting an actual cookie when she is eating a bland cracker is that eventually the jig is up — and she won’t settle for a cracker anymore.

There is a similar tactic going on in stocks right now — and the jig is almost up…

This past Friday, the market got a “cookie” of its own when the Bureau of Labor Statistics reported a whopping 280,000 jobs created in May. As a result, interest-rate hike expectations have moved back to this September rather than later in the year.

The “cookie” is that this jobs number increases expectations of a normalized rate environment sooner rather than later, which, in turn, would mean traditional income assets, such as Treasurys and CDs, will be back in vogue.

But just as a plain cracker doesn’t soothe the palate like a chocolate-chip cookie when you’re in need of something sweet, neither is this a sign that America is ready for a normalized interest-rate environment. A rate hike too soon could trigger economic collapse for the U.S.

The end result — high-yield stocks are where you want your money.

Shadows of Economic Collapse Keep Rates Unchanged

Since mid-January, interest-rate-sensitive stocks, such as real estate investment trusts (REITs) and utilities, have plummeted — and the jobs number certainly didn’t slow the fall. In fact, the jobs report caused these stocks to fall another 1% across most high-yield positions.

This expectation-beating jobs number masks the real fate of interest rates: Rates will remain near zero for longer than most expect.

It’s a rhetoric we write about often here, and one so strong that our investment director has coined this as the “Generation of Yield” — meaning the hunt for yield is nowhere near over.

To come to that conclusion, look no further than our wobbly fiscal state. America’s fiscal health is built around $18 trillion in debt and that number is still growing. Nothing about that is sound enough to support a rising rate environment with an economy that is slowing.

Even more worrisome, our sluggish economic recovery has been fueled by the largest involvement by a central bank in history — Quantitative Easing.

The Federal Reserve realizes this.

It’s why it has spoken publicly quite often that its job would be easier if the government would ease up on its reckless spending habits.

In short, a rate hike that comes too soon or moves too fast risks not only a market crash, but also the crippling of our government — something Fed Chair Janet Yellen  does not want to be responsible for triggering economic collapse within America.

That’s why today is not the time to dump your safe-haven stocks that are getting beat up. Instead, it’s time to add a high-yielding opportunity to benefit when investors realize the hunt for yield continues.

High-Yield REIT

Once investors come to the reality that yields are essentially going nowhere for a very long time, they will flood back into these high-yielding assets to survive in a no-income world.

Stocks classified as REITs have fallen 15% from their January highs. Of course, this also means that their yields have increased by basically the same amount because yield and price have an inverse relationship.

An easy way to play this interest-rate conundrum and lock in a high yield is through a REIT exchange-traded fund such as the PowerShares KBW Premium Yield Equity REIT (NYSEArca: KBWY).

This fund invests in stocks that are classified as a variety of different types of REITs. It gives us exposure to everything from retail and office REITs to health care and hotel REITs. Needless to say, this is an extremely diversified REIT index.

It has a current yield of 5.16% — up from 4.25% just four months ago. This yield is more than double the average 2% you could generate from the S&P 500 and dwarfs the current 0.6% for the average one-year bank CD.

The ETF will serve us well as the realization that the cookies we have been eating are not actually getting us to a normalized rate environment. REITs will be back in fashion, and you are positioned to reap those benefits.

Chad Shoop Sovereign Investor
Chad Shoop
Editor, Pure Income