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Silver Lining Beige Book

For several years the Federal Reserve and other financial titans such as the World Bank and the IMF have been singing, “The Sun Will Come Out Tomorrow,” and then reversing their forecasts when tomorrow arrives. Now when they trot out that tune smart investors hear another song from the musical Annie: “It’s the Hard-Knock Life.”

Those forecasters currently say that 2017 is the big year when we will return the land of global economic milk and honey. We’ll see. Certainly the U.S. economy has shown signs of strength, but Fed Chair Yellen says she expects modest growth at best, and the Fed’s “Beige Book” of data, interviews and forecasts is decidedly mixed on the recovery.  

While stimulus from the Fed and other central banks can stabilize economies, the massive amounts of debt can be a drag on growth, or worse, cause bubbles that pop, such as in China. That’s why in today’s environment the best strategy for income investors to stick to strong businesses with a global reach – a core tenet of our Global Income Edge investment philosophy.

This is particularly true because the global situation has darkened somewhat. As a student of the Great Depression and other manias and crashes, I’ve found that a common precursor to a market crash is when debt creation exceeds growth. 

I have been concerned with the build-up of debt in the world – more than $57 trillion according to McKinsey & Co. – since the 2008 financial crisis.  But until recently it seemed that global growth would stay a step ahead of this growing debt load. That’s not the case anymore. 

Global debt, according to many analysts, is rising at 5.3%, much higher than the 3.4% in global growth predicted by the IMF.  Adding to the dark picture, the IMF in early March warned that the global economy faces a growing “risk of economic derailment,” and that it was most likely going to lower its global growth forecast.

Silver Lining

Federal Reserve chief Janet Yellen’s decision to hold off raising rates further confirmed this gloomy outlook. 

On the bright side, her low-rate strategy is having the effect of boosting some of our Global Income Edge investments substantially– some by double digits. Continued low rates make our relatively safe, high dividend stocks more attractive to yield hungry investors who are piling into them.      

The surge in share prices just confirms our strategy of holding globally diversified income investments, especially when rates are low.

Higher share prices leaves us with a nice choice: Do we sell some of our winners and cash in, or do continue to hold them and collect nice dividends?

Of course, our highest goal at Global Income Edge is finding solid businesses that deliver bond-like performance. But the types of price appreciation we’re now seeing means  we can collect the equivalent of several years of income instantly if we sell certain stocks. And this choice becomes compelling given the global economic forecast.

We’ve decided to hold on to most of our income investments, even with some of them sitting on double digit gains. One reason is selling may cause many investors to have to pay a steep premium for the same income investments months or years later if the global economy does not fully recover.

And we’ve seen the phenomenon several times in the last few years where investors sold out of dividend-paying stocks expecting higher treasury rates that never materialized.

However, we did sell a couple Global Income Edge holdings this week with strong gains because we figured they didn’t have strong enough prospects. 


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