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But What If Interest Rates STAY Low?By
Tuesday, May 20, 2014
The best interest-rate "guru" over the last 40 years now says that interest rates could STAY low...
What if he is right? What will that mean for your investments?
The implications are profound. And the guy making the prediction is as reliable as anyone.
You see, this man is so good at what he does, he now controls $2 trillion dollars of investor money...
He was put in charge of these $2 trillion dollars by delivering amazing investment returns over his 40-year career. He delivered these returns with relatively low risks – by mostly investing in the bond market. If you want to make money in bonds, you have to understand interest rates.
This man is known among investors as The Bond King. His name is Bill Gross. And the company that he founded, PIMCO, manages $2 trillion dollars of investor money today.
When Gross talks about bonds and interest rates, I listen. He is not always right, of course. But he's been more right than anyone else across decades. His track record proves it.
Recently, he announced his new investment thesis...
In short, Bill Gross believes that the new "neutral" interest rate is much lower than people think.
I will explain what he means in a minute. But let me jump to the conclusion up front:
If Bill Gross is right, it means that – even though stock prices and real estate prices have gone up – they are not at all overvalued at current levels. Based on this, I expect they could continue higher – possibly much higher.
Let me explain Bill Gross' new investment thesis a bit more...
Most investors expect interest rates will go up someday – back to a "neutral" level – as the economy goes back to "normal."
But what is the "right" level for interest rates? What is "neutral"?
Most investors think that in normal times, a "neutral" interest rate would be about 4%. (When the Fed raised interest rates in 2004 to 2006, it raised them to 5.25%.)
Gross calls that prevailing 4% belief into question... He thinks the new "neutral" interest rate going forward is closer to 2%.
Specifically, he wrote in his Investment Outlook that:
The "focus on the future 'neutral' policy rate is the critical key to unlocking value in all asset markets. If future cash returns are 2% (our belief) instead of 4%, then other assets such as stocks and real estate must be assumed to be more fairly priced as well. Current fears of asset bubbles would be unfounded."
In plain English, Gross just said he's onboard with my Bernanke Asset Bubble thesis...
He said that interest rates will stay lower than people can imagine for longer than people can imagine... That means assets like stocks and real estate are not overpriced at current interest rates.
Gross is an extremely influential investor... Investors are talking about this... And we've seen interest rates fall since he wrote this Investment Outlook.
Investors are following his lead, thinking that the new "neutral" interest rate in the future might just be closer to 2%, not 4%. That has already caused interest-rate expectations to head lower and asset prices to head higher.
It's already happening... as I write, the benchmark interest rate just fell to lows not seen since October. (The benchmark 10-year U.S. government-bond yield just fell to 2.5%.) And stocks are sitting near all-time highs.
Importantly, if the new "neutral" interest rate is 2%, then stocks and real estate now appear to be reasonably valued – even after they have run up.
When Mom and Pop America realize that they can only earn 2% interest at best, they will be forced to seek out other investments.
I strongly believe Mom and Pop will take their money out of cash eventually, and put that money into stocks and real estate – driving these prices up.
It might be hard to imagine a world of very low interest rates for a long time... At the same time, it's dangerous to bet against The Bond King about interest rates.
For me, personally, I am loaded up on Florida real estate. And I haven't personally sold a stock this year. I intend to ride both the stock market and the real estate markets higher... watching my trailing stops closely in the stock market.
I believe the Bernanke Asset Bubble is still intact... The Fed will keep interest rates lower than anyone can imagine, for longer than anyone can imagine. And that will drive stocks and real estate to higher highs than people can imagine.
That has been my story for years... And it seems that The Bond King is now onboard with my thesis.
I will watch my trailing stops in the stock market, of course. But I am not selling, yet. I suggest you do the same...
Good investing,
Steve
Further Reading:
"Houses in much of America are incredibly affordable right now," Steve writes. "This is a one-way bet." Even though prices are up, Steve says today's prices are cheaper than they'll ever be again. And there's one simple reason why. Find out what it is right here.
Steve says if you had sold your stocks at new highs in the past, "you would have missed out on some phenomenal gains in stocks." Surprisingly, buying stocks at new highs has been a winning strategy since the beginning of stock market history. Get all the details here.
Market NotesA BULLISH BREAKOUT FOR INDIA Today's chart shows that things are looking up for India...
Last month, Steve laid out the bullish case for India. India is one of the most promising emerging markets on the planet. It just elected a Prime Minister who is friendly to free enterprise... and opposed to the stifling bureaucracy India is famous for.
One way to track (and trade) this idea is the PowerShares India Portfolio (PIN). It's a fund that gives investors a "one click" way to buy and sell a diversified basket of Indian stocks.
As you can see from the three-year chart below, Indian stocks have struggled since 2012. But things are starting to look up. In response to the recent election, PIN has climbed from $17 per share to $21 per share... and just broke out to a two-year high. It looks like a bull market is starting in India...
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