How Central Banks Enrich Insiders - Vivek Kaul's Diary
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How Central Banks Enrich Insiders

Jun 3, 2016


Another day. Another step closer to madness. I'm not talking about myself. Or yourself. I'm talking about the modern experiment with money and the attack on your savings. You know, the one distorting markets, changing incentives, and generally making the next inevitable financial panic a real doozy.

Specifically, I'm talking about the decision announced earlier today by the European Central Bank (ECB) to buy corporate bonds. The bond buying will begin 8 June. The bank will have at its disposal as much as €80 billion per month (£62 billion).

Where does that money come from, you might be asking? From nowhere, of course! That's the magic, the alchemy, the brilliance of modern monetary policy. Money for nothing. But your bonds at a price. What a deal, if you're a corporate borrower.

Before I get to how this new wrinkle could affect markets, there were some important qualifications. Not every corporate bond is eligible for purchase. In order to qualify, it must be investment-grade, euro-denominated, and the company issuing it must be incorporated in the eurozone.

Further, the ECB will consider negative yielding bonds - as long as those bonds don't have yields lower than the minus 0.4% overnight deposit rate (which remained unchanged). What's more, the bonds must have a maturity of six months or more. Got all that?

Good! An alternative analysis of the facts might be this: the ECB has engineered another wealth transfer to rich corporate borrowers. Those borrowers can issue new debt, take the money, buy back shares, or other companies, or anything really. The restrictions on eligibility narrow the field of participants, thus making sure Europe's insiders' club is run firmly for the benefit of insiders.

There are likely to be other effects as well, not just the enrichment of corporate borrowers. For example, by buying up a lot of investment grade corporate debt, the ECB creates the incentive for front-running (speculating on which bonds the bank will buy ahead of the 8 June buying). The front-running isn't investing. It's just gambling based on central bank policy.

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But how many individual investors speculate on ECB asset purchases by buying corporate bonds? Not many (I wouldn't have thought). The net effect for the rest of us is that with all the high-grade corporate debt hoovered up by the ECB, we're forced to go further, wider, and riskier in the hunt for yield.

Not coincidentally have both David C Stevenson and Stephen Bland been here at Friars Bridge Court in recent weeks. David, as you may know, has just recently joined with Cris Heaton and John Stepek in running the investment strategy for Lifetime Wealth. It's a two-phase strategy: make it; then, make it work for you.

In investment terms, you're more likely to hear those phases called "accumulation" and "distribution". It just depends on where you are in your investment life. Cris and John focus on low-cost funds that help you build up a retirement nest egg without taking massive risks.

David's work helps investors who already have a retirement portfolio but need to regularly generate income from that portfolio in their golden years (without taking massive risks). Both approaches are designed to be lower-risk strategies for growing wealth and generating income. But according to Stephen Bland, the lowest-risk way to benefit from dividends is to buy the shares of the big companies that pay them and never sell them.

That's right, never. Ever. As in ever. Never.

Please Note: This article was first published in Capital & Conflict on June 2, 2016.

Dan Denning studied literature and history, moving to Agora Financial in Baltimore fresh out of college. Working alongside Bill Bonner and Addison Wiggin, he became managing editor of Strategic Investments. He then moved via Paris and London to Australia, publishing a book - The Bull Hunter - along the way, and opened Agora's successful office Down Under. He returned to London in 2015 and became the publisher of Fleet Street Publications' financial newsletters.

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