A Surprising Take On The Economy — And How To Generate More Income (With Less Risk)
As I write this, the financial news channels are parsing over Federal Reserve Chair Jerome Powell’s every word. And for good reason. The Fed announced that, as expected, it will keep interest rates in a holding pattern while beginning to taper its massive asset purchasing program.
Frankly, this is all pretty much expected and baked into the cake, so to speak. But what I’m particularly interested in is how many times the words “transitory” and “supply chain” were used in Powell’s press conference. That’ll give investors good indication of how much the Fed is worried about potential threats to the economy right now.
But before I start scanning through the transcript, I want to turn to my colleague Amber Hestla, Chief Investment Strategist of Income Trader. That’s because she’s done a better job of avoiding threats – while delivering consistent income-producing trades – than just about anyone I know…
We’ve told readers before about your military background and how you studied under some of the most highly-respected trading experts around after leaving the military. But you recently told us about another aspect of your life that has affected how you approach the market…
Well, as you mentioned, I was in the Army. I was a military intelligence analyst to be specific, and my job was to identify threats on the battlefield, evaluate what risk they posed, and then suggest ways to mitigate – or eliminate – them.
Once you’ve done this kind of work, you realize there’s really no greater pressure than that.
But looking back, it wasn’t just that experience that taught me the value of risk when it came to the markets.
My father was a logger and my mom was an accountant… So I learned at a very early age that money didn’t grow on trees. If you wanted something that wasn’t a necessity you had to earn it by mowing lawns or washing cars.
The same holds true for building wealth. There’s no shortcuts. The key is to play by the rules, invest smartly, keep a lid on risk, and always consider the worst possible outcome.
You had an interesting take about the GDP numbers that come out last week. Care to share your analysis with our readers?
Yeah, last week’s GDP report seemed to send much of the financial media into a frenzy. Not to pick on CNBC, but one story (with a particularly ominous headline) noted that economists surveyed by Dow Jones had been expecting more robust growth of 2.8%. Growth for the quarter was also less than a third of the 6.7% increase seen in the second quarter.
They noted, “Consumer spending, which makes up 69% of the $23.2 trillion U.S. economy, increased at just a 1.6% pace for the most recent period, after rising 12% in the second quarter.”
But here’s the thing I think they’re all missing… And it deserves a deeper analysis since slow economic growth could sink the stock market.
You see, the report really wasn’t that bad. Remember, the economy was growing about 2% a year before the pandemic shut down the economy. We seem to be heading back to that pace now.
We all knew that 6.7% growth was unsustainable. Right? They seem to be ignoring this fact.
At the beginning of the quarter, expectations were high, but they were unrealistic. The supply chain problems that are so familiar now were already in place. The Delta variant of COVID had been around for months, and the economy isn’t shutting down again now that vaccines are available. And the shortage of workers has been a problem throughout the recovery.
So instead of panicking over this, you’re saying we’re returning to ‘normal’. Should we be encouraged by that?
Pretty much. Growth of 2% is sustainable and 3% is optimistic. We are almost exactly where we were at the end of 2019. One difference is the fact that consumers have trillions of dollars in catch-up spending to complete.
That could lead to more gains in the market. The chart below shows the annual change in personal consumption expenditures (PCE) over the past few years. PCE is a measure of consumer spending that’s closely monitored by the Federal Reserve.
Source: Federal Reserve
The chart shows that, before the pandemic, PCE grew fairly steadily. It increased by about $650 billion a year in the three years before the pandemic hit.
As we all know, spending fell sharply during the pandemic. Between March 2020 through February 2021, the year-over-year change in PCE was negative as consumers stayed home with restaurants, movie theaters, and other venues closed. They were forced to save money, and checking account balances soared to record highs.
Over that year, PCE fell by $5.9 trillion. As the economy reopened, pent-up demand led to a surge in spending. Since March 2021, PCE has exploded, and consumers have spent over $14 trillion. That’s a lot of money, but it’s less than would have been spent in a normal economy. If PCE expanded at its pre-pandemic trend, consumers would have spent about $3.5 trillion more than they have since March 2020.
That indicates there is still a great deal of demand for goods and services.
Now, no matter how that money is spent, it will boost GDP, corporate earnings, and the stock market.
Part of your “risk-averse” approach is that you trade options for income. How does this approach actually mitigate risk for investors?
Well, for starters, the strategy we use in Income Trader involves selling put options. It’s one of the most conservative options strategies around.
A put option potentially obligates you to buy a particular stock at a specified price (known as the “strike price”) for a limited time period. For taking on this obligation, the option seller receives an upfront payment. This is what’s called a “premium”.
The best-case scenario is that the stock remains above the strike price. This means we get to keep the income we receive, walk away, and make a new trade. Rinse and repeat. Worst case, the stock declines to the strike price, and your put options are exercised.
In most cases, we’ll be out of the trade long before then.
You and the team over at Income Trader just released your Income Millionaire Project to help spread the word. What can you tell us about it?
I’ve been trading this way for years… but people are surprised when I tell them that I’ve used options to make winning trades more than 90% of the time. They’re even more surprised when I tell them how much reliable income this can generate…
That’s why I couldn’t be more excited to get the opportunity to show this off. Because it allows you to collect instant cash payouts like $550 on Nike, $640 on American Express, $770 on Dillard’s, $1,020 on UPS, $1,105 on Lowe’s, and more…
The best part is that these payouts happened instantly. No waiting around and hoping that the stock goes up over months and years. And in just a few weeks, we can turn right around and make another trade like it again. In fact, once you get up to speed, you may never trade the same way again – and with enough winners, you could be on the path to a million-dollar portfolio.
Yes, you will need to learn how it works. And it will take a little effort on your part – but that’s why my team and I are here to help.