Is the Federal Reserve Discussing Helicopter Money, Too?

'Helicopter Ben' visits Tokyo... 'Perpetual bonds' could be next... Is the Federal Reserve discussing 'helicopter money,' too?... China devalues again... Investors are stampeding into bond funds... Defaults are still soaring... Banks are still getting squeezed... How to double or triple your 'safe money' income...

Regular Digest readers know that former Federal Reserve Chairman Ben Bernanke visited Tokyo last week...

Several reports suggest "Helicopter Ben" was visiting to discuss new forms of easing and stimulus – including so-called "helicopter money," where new money is printed and directly injected into the economy. There have been no official statements on the visit, but some details have emerged...

According to Bloomberg, Bernanke had previously suggested a specific form of helicopter money to one of Japanese Prime Minister Shinzo Abe's key advisers. From the report...

Etsuro Honda, who has emerged as a matchmaker for Abe in corralling foreign economic experts to offer policy guidance, said that during an hour-long discussion with Bernanke in April the former Federal Reserve chief warned there was a risk Japan at any time could return to deflation.
He noted that helicopter money – in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them – could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option, he said.

"Perpetual bonds" are zero-coupon debt with no maturity... In other words, they're bonds that pay no interest and essentially will never return principal.

Japan could issue new perpetual debt (the next best thing to firing up the printing press without all the negative connotations) or – according to Jefferies Chief Global Strategist Sean Darby – swap them for existing debt.

Because 90% of Japanese government debt already yields 0% or less, the government could potentially convert some of this existing debt into perpetual bonds... transforming it into debt that would never have to be paid back. This would give the government a "clean slate" to increase spending further.

Another Abe adviser – Koichi Hamada – told Bloomberg that helicopter money was not specifically discussed during Bernanke's meeting last week... and said there's "no chance" that Japan will resort to helicopter money anytime soon.

Maybe he's right... But we also note the Japanese government said there was "no plan to adopt negative interest rates now" just one week before they were unleashed...

In related news, a Federal Reserve official suggested helicopter money could be "on the table" here in the U.S. as well...

Speaking with Australia's ABC News network last week, Federal Reserve Bank of Cleveland President Loretta Mester – a voting member of the Federal Open Market Committee ("FOMC") that sets interest rates – said direct money printing could be the "next step" the Fed tries. From ABC...

"We're always assessing tools that we could use," Dr. Mester said in response to a question from the ABC about the potential use of helicopter money... "In the U.S. we've done quantitative easing and I think that's proven to be useful," she observed.

"So it's my view [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative."

Dr. Mester's cautious response to the helicopter money option follows recent comments from the Federal Reserve Chair Janet Yellen that the measure could be used in "extreme situations."

Meanwhile, China's quiet devaluation of the yuan continues...

China's currency fell below the important 6.7 per dollar level for the first time in more than five years. The yuan fell as low as 6.7021 – its weakest level since September 2010 – before closing slightly higher on Friday.

The yuan has now lost more than 3% of its value versus the dollar so far this year, and analysts believe further devaluations are likely. "The yuan's break of the 6.7 level will likely have an impact on sentiment, as the market may take this as a signal that the authorities could allow further depreciation," Irene Cheung, a foreign-exchange strategist at Australia and New Zealand Banking Group, told Bloomberg.

We continue to believe further devaluation is likely.

The recent rally in bonds has been one for the record books. And exchange-traded funds ("ETFs") have been one of the biggest beneficiaries...

Two weeks ago, the iShares iBoxx Investment-Grade Corporate Bond Fund (LQD) took in $1.1 billion of new funds in a single day. According to Bloomberg, this is LQD's "biggest daily inflow ever and the largest ever recorded for a corporate bond fund."

Last week, high-yield (or "junk") bond funds took in more than $2.1 billion in a single day... including more than $1.1 billion in high-yield ETFs like the iShares iBoxx High-Yield Corporate Bond Fund (HYG). This too was the largest one-day inflow into high-yield bond funds on record... And last week set a new all-time record for inflows into U.S. corporate debt.

In total, yield-hungry investors have poured a mind-boggling $124 billion into bond ETFs so far this year, according to the Financial Times.

Given these figures, you might think the credit market worries that Porter has warned about have subsided.

Unfortunately, you would be wrong...

New data show high-yield bond defaults are still increasing. Credit-ratings agency Moody's says U.S. speculative-grade defaults spiked to 5.1% in the second quarter, the highest level since the financial crisis.

Year-to-date defaults have already passed last year's total, and they could be headed much higher. As Bloomberg reported...

At $50.2 billion, U.S. high-yield defaults have already surpassed the $48.3 billion total for all of 2015, and they're on course to reach as much as $90 billion by year-end, according to a separate July 12 report from Fitch.

Regular readers won't be surprised to learn much of the blame falls on energy companies. Energy debt accounts for nearly $29 billion in defaults this year.

But this also means more than $20 billion – or 40% – came from non-energy debt. The evidence is clear: These problems are no longer isolated to oil companies alone.

In short, investors are rushing into corporate bond funds like there's no tomorrow... as fundamentals are rapidly deteriorating.

Worse, these investors could soon discover that the massive liquidity available when they were buying these funds has suddenly disappeared when they need to sell. As Porter explained in the September 29 Digest...

There's going to be a massive crisis because the liquidity profiles of ETFs and mutual funds don't match their underlying assets. It can take weeks or even months to sell a bond that's under distress. Meanwhile, these funds must provide daily liquidity to their investors. (Redemptions must be paid within seven days.)

Where's that money going to come from? The Wall Street Journal recently conducted a simple survey of several major bond funds run by institutional investors like BlackRock, Dodge & Cox, and Vanguard. It found plenty of examples of these funds holding bonds that would take nearly a year to sell – and even some bonds that nobody can sell right now.

We can't say exactly when or how this will end, but we can guarantee it will not end well...

Finally, Bank of America (BAC) became the latest big U.S. bank to report second-quarter earnings, before the opening bell this morning.

The bank reported a better-than-expected profit of $4.2 billion, or $0.36 a share. Analysts expected earnings of $0.33 per share, according to Thomson Reuters.

Today's earnings followed reports by three other large U.S. banks last week: JPMorgan Chase (JPM) last Thursday, and Citigroup (C) and Wells Fargo (WFC) on Friday.

All four of the biggest U.S. banks have met or exceeded analyst earnings expectations. And all have reported strong increases in trading revenues (largely due to increased bond trading). But all four have also reported a concerning decline in net interest margin, or "NIM." Bank of America in particular reported its NIM fell to just 2.03% last quarter, an all-time low.

If you're not familiar, net interest margin is simply the difference between what a bank charges for loans and what it pays to depositors. Continued declines are a clear sign that years of super-low interest rates are slowly squeezing the banks.

Big U.S. banks are historically cheap, unloved by most investors, and generally in much better health today than they were before the last financial crisis. But if interest rates stay low – or worse, move even lower into negative territory – it could it could be years before they return to growth.

In the meantime, our colleague Dr. David "Doc" Eifrig says today's slow-growth environment is ideal for investors in banks' preferred shares.

As we explained last week, preferreds are often called a hybrid blend of stocks and bonds. They're much safer than common stocks, but offer much more upside than bonds. According to Doc, investing in preferred shares is an easy way to double or even triple the income you're getting from your "safe money" portfolio, without having to use options, leverage, or anything like that.

Again, as we noted last week, Doc recently recommended several individual preferred shares in his income-focused newsletter, Income Intelligence. He also recommends a "one click" investment that will give you exposure to a diversified portfolio of preferreds as easily as buying a single stock... And it's currently yielding nearly 8% today.

If you need to earn more safe, consistent income today, you owe it to yourself to learn more. Click here for all the details... including how you can get immediate access to Doc's $1,500-per-year Income Intelligence service for just $59 today. (This does not lead to a promotional video.)

New 52-week highs (as of 7/15/16): CME Group (CME), Cisco (CSCO), WisdomTree SmallCap Dividend Fund (DES), Cedar Fair (FUN), iShares Core S&P Small-Cap Fund (IJR), VanEck Vectors Coal Fund (KOL), 3M (MMM), PowerShares High-Yield Equity Dividend Achievers Fund (PEY), Procter & Gamble (PG), Regions Financial – Series B (RF-PB), Spectra Energy (SE), VanEck Vectors Steel Fund (SLX), and ExxonMobil (XOM).

Should Porter resign? Several readers share their thoughts about Friday's Digest. Send yours to feedback@stansberryresearch.com.

"Great Friday Digest plus ridiculous resignation requests from subscribers I can not understand. Seriously, I don't know how you put up with this crap! Thanks for not resigning. I have been with you since [the beginning] and I have to say that according to my report card you have earned an A+ almost every year you have published. Hang in there Porter, see you in Vegas in September!" – Paid-up subscriber Charlie L.

"I'm just your average US citizen. I'm not hugely wealthy and I would never claim to be a savvy investor. I simply want to learn about our complex market and hear from people who are entrenched in this whole mess everyday. If we can't see that this entire system is unsustainable we are all, simply put, fools. I was going to use the word 'idiots' but felt that would not be fair. We are not mindless. We are just people who want to believe that it simply won't happen to us.

"I enjoy the honest approach that Mr. Porter uses. The American people get up everyday, go to work, work hard and expect their government to protect them. Unfortunately, and this is where the word 'fools' comes into play, we are all burying our heads in the everyday behavior patterns and ignoring all the signs that our way of life has to change.

"20 Trillion dollars in debt. I remember when we all were horrified by 14 Trillion dollars of debt. It is absolutely the scariest thing I have ever seen. I'm just looking for direction to protect what I have. Should I bail out and bury everything in the back yard? Should I just ride the inevitable crash and hope it will come back? Thank you for telling the truth. Even if not everyone wants to hear it. Keep up the great work and again, thank you." – Paid-up subscriber Adam R.

"I don't write often, but I want to comment on this week's Friday Digest. Sometimes Porter's writing style is a little abrasive and has a lot of 'I told you so' tone, but I don't mind. I think his outlook is right on the money and the performance of my investment accounts substantiates this. Keep it up Porter!" – Paid-up subscriber Jeff V.

"I think the Fire Porter thing is a bit like a coach who has a brilliant career and then implements a 'new system' because the current environment of the sport calls for updated strategy. He loses some big games and there is a growing chorus for his resignation. And then when, thanks to the new strategy and the coach's ability to tune out the noise, the team wins the championship at the end of the year, all his fans claim to have been with him all the time. The current financial system is obviously teetering on the edge of the abyss – anyone who cares to look behind the curtain can see that. So Porter is only laying out the strategy to deal with this new environment when it will be needed most, and at that point everyone will claim they believed in him all the time.

"For my part, I'm far from rich but have spent a few thousand dollars on Stansberry's products over the last several years. The value I've received in financial knowledge alone has been more than double that outlay. The actual money I've made is probably 10 times what I've spent. I've made a ton of money the last 6 months alone and yet still feel prepared to not only weather, but prosper in the coming storm. In short, Porter speaks the valuable but unpopular truth about tomorrow and yet still manages to make me money today. Fire him? I'd vote to give him a raise." – Paid-up subscriber David S.

Regards,

Justin Brill
Baltimore, Maryland
July 18, 2016