Churchouse Letter
December 2014         by Peter Churchouse

Are You Anxious for Income?

How the world's central banks have dropped a bomb on the best-laid retirement schemes of many a smart man and woman!

People all over the world are struggling to safely generate income.
We're six years into zero rates, and much of the world is now starting to ease monetary conditions further!
We run through a range of investments that can provide income and capital appreciation.

I want to start with three short encounters I've had in the pase month. Each one illustrates a pressing challenge facing us all.

Part I: An Email

The below is an email I received from a close friend earlier this month.

I have asked their permission to include this in The Churchouse Letter, but with the name and personal details redacted.

I just wanted to follow up with you a bit more on what we were talking about for my cash and income investments. I know you said you're not a financial advisor. I understand but I would appreciate your thoughts and ideas if possible. I am a little behind the times on all this! I saw at the bank that I can get 5% interest if I change money into NZ$ do you think it is worth doing this, I think the minimum is HK$80,000.

More later on why this is a great deal for the bank – but not for you.

Part II: Dinner

Every few weeks I gather with some of Hong Kong’s top businessmen for a dinner. Behind the closed doors of a private room tucked away in the back of a restaurant, we discuss all manner of topics. Where is China heading? What are the implications of the bear market in oil and commodities? What are the ramifications of further political destabilization in Russia?

This group is comprised of some of the best business minds in Hong Kong: CEOs, ex-CEOs and heads of industry. These are some of the best-connected people in the region.

The group raised the subject of interest rates. The gentleman on my right remarked that his elderly retired father, a former senior employee of the U.S. federal government, was struggling. Before the global financial crisis (GFC) his nest egg, mostly held in bank deposits and short-term savings deposits, brought in about US$4,000 per month in regular, dependable income.

Today that money earns him less than US$100 per month.

He’s seriously struggling…

Part III: Lunch

A couple of weeks ago, I caught up with a good friend of mine over lunch. Many years ago he built and sold a large financial-services company in Asia. He made a fortune. He now owns real estate all over the world. He is wealthy in every sense of the word.

But he was complaining bitterly about his inability to generate income.

When he sold his business, he put a large proportion of the proceeds into safe, interest-bearing investments. This funded his life nicely.

Times have changed. The fed funds rate, one of the most important interest rates in the U.S. economy, has been near zero for six years now! Central-bank policies have forced him out of his low-risk income-producing assets. They simply don’t generate enough income anymore.

He was visibly angry.

He has been forced to take more risk than he wants to secure any income at all. He’s a conservative investor and is unhappy he’s being forced into this position.

But at least he is armed with knowledge from years in finance that allows him to make these adjustments.

Many, like my friend who sent me the email, don’t have those weapons in their armoury.

Asset Rich… Income Poor

These people have three things in common: they are in their 50s, or older. They are cash- and asset-rich. But they are income-poor.

They’re in a quandary. They need income. But they also need to preserve their capital and keep their risk level low.

We all know that it’s tough to generate decent income, safely, from investments at the moment. Heck, we’re SIX YEARS into a zero-interest-rate regime in the United States. And for some people the situation is getting desperate.

And for some people the situation is getting desperate.

It doesn’t matter whether you’re a multimillionaire or a retiree with modest savings. The problem is the same.

A few years ago, when people sought my advice on investments they were asking about companies, macro-economic calls, or real estate. What’s my view on Thai-land? Where is the yen headed? Should I be buying/selling this apartment?

Now, people are at their breaking point. They just want to know how they can produce enough income to survive.

Unfortunately I have more bad news.

First, I don’t believe this situation is going to improve any time soon. As long as central banks around the world continue to print money, yields will remain low, and asset prices will remain high.

Second, if you want income, you will need to take more risk. It’s that simple. What’s not simple is how you go about assessing that risk and minimizing it.

Our Take on Five Asset Classs

So how did we reach this juncture? Financial repression. This is a well-worn story now.

You know that after the financial crisis, the Federal Reserve pushed rates to zero. They have suppressed interest rates by buying bonds. The Fed wants inflation. You know that the Fed (and now the European Central Bank) are doing everything they can to engineer a recovery in the price of assets of all kinds. You know they want companies to start borrowing and investing. They want consumers to consume, to borrow and to buy.

Janet Yellen doesn’t want you to save money. If you’re saving instead of spending, then to the Fed you’re part of the problem, not part of the solution!

I want to run through our main income-generating asset classes and give you an idea of what we’re thinking.

In particular we will be looking at:

  • Bonds (both government and corporate)
  • Preferred stock
  • REITs
  • High-dividend stocks
  • Solid-dividend growth stocks

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