The current financial paradigm is crumbling beneath us. This is not a temporary disruption, it is a meltdown. All of the mechanisms that drive paper markets are being eroded, and more and more market participants are being, quite literally, robbed — and without consequence.
Income generation through investing comes down to a troubling set of problems, because revenue comes from the interest yield on various debt-based instruments. Which debt does one buy during a credit crisis? Obviously not European debt. Corporate debt is suspect — and when the market is this high if it takes a turn for the worse corporate debt could easily take a 30-50% haircut overnight.
US debt has incredibly low yields and has been in a 30 year bubble, suggesting that it could collapse if inflation becomes a problem.
Other countries currencies seem dangerously manipulated by central banks, so it is hard to build a portfolio of high yield currencies without risking a monetary crisis wiping a large portion of the value out.
That leaves high dividend stocks, which are, just like every other paper asset, overvalued, dangerously dependent on the stock market continuing to move forward — and what would cause the stock market to continue to move higher here? The only thing that could is a large scale global bailout which would be highly inflationary and bad for all debt (income) instruments — with the exception of a select few Euro bonds. Bonds so toxic that they blew up MF Global and caused a global liquidity vacuum. And let’s not forget about Dexia, who also had a lot of Euro debt exposure. This highly rated European financial passed all its stress tests and subsequently collapsed, needing a bailout.
Any investment in ‘income’ instruments is highly speculative and dangerous. Look at the charts for varying income instruments: sovereign bonds, corporate bonds, junk bonds, high dividend stocks, high yielding currencies — then tell me if based on just the technical analysis, they seem like good investments.
Then add to it the macroeconomic foray. The likelihood of either a global banking system disruption or a highly inflationary bailout are both negative for most income instruments.
If we have a disruption, income instruments will crash in value very, very quickly. No stop loss order will adequately protect against a waterfall collapse. If instead we have a global bailout, money will rush out of income instruments in to speculative assets.
Most retirement age Americans are struggling with this problem. Millions are unable to get yield, which forces them in to dangerous assets. Investors have to be patient and wait for the opportunity to come — rather than get destroyed by the rush to the exits that is almost certain at this point.