The Fed debt problem
A year ago, the Federal Reserve raised interest rates for the first time since the Great Recession.
This month, they raised interest rates for the second time by a quarter point to a target rate of 0.5% to 0.75%.
For income-seeking investors, this is a glimmer of hope that traditional yield assets like savings accounts, bonds, and certificates of deposit will become a viable source of income.
But, and I say this as a friend, don’t flatter yourself.
The Federal Reserve raising rates is just the beginning of what would have to happen for your savings account to pay you a decent rate of return… but we still have a long way to go.
Gone are the days of generating a safe and consistent 5-10% return when it comes to traditional assets, and President-elect Donald Trump’s pro-US agenda will not bring back those glory days.
But there is still hope… just not where you are used to looking. That’s because those traditional assets won’t generate a significant amount of income for years to come thanks to America’s addiction to debt.
debt is too high
Almost every plan Trump has proposed so far is expected to lead to another increase in debt: infrastructure spending, tax cuts, increased military spending, etc.
As long as our debt remains at ridiculous levels (currently $19.9 trillion), interest rates will be capped. And we’re almost at that level now.
Any significant movement in interest rates means that the massive amount of US debt becomes unmanageable and could literally bankrupt our government and our country.
It’s a hard addiction to break, especially since interest rates (and yields) have been in a downward spiral since the early 1980s.
I don’t see this downward trend abating any time soon. In other words, traditional yields will not return to a significant level any time soon.
But, as I mentioned, there is still hope for income seekers: alternative methods of generating a steady income.
Leveraging Traditional Income
No, I’m not just talking about buying stocks that pay dividends. My favorite strategy goes beyond this traditional income method.
I employ a little-used strategy with stock options that allows you to essentially name the price of a stock and get paid for doing so. It’s a win-win.
So instead of going out today and buying strong, dividend-paying stocks at the current price, we can pick a deeply discounted price and get paid to make this deal.
Basically, this strategy has two outcomes: you walk away with a steady stream of income and never have to own a stock to do so, or you can own a great company cheaply while getting paid for the effort.