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Stocks "Extremely Cheap Now," Says LegendBy
Tuesday, May 5, 2015
"One thing you can say is, stocks are cheaper than bonds. Very definitely."
Legendary investor Warren Buffett was on CNBC yesterday, talking about stocks.
He said what I've been saying – for years.
He said that stocks are somewhat expensive today – IF these were "normal" times with normal interest rates.
The thing is, times are NOT normal today. Interest rates are not normal. They are near zero percent...
"I would've thought by now you would have seen much higher rates than we have now, which is essentially nothing," Buffett said.
"If these low interest rates prevail for five or 10 years, you'll look back and say stocks were very cheap. If interest rates normalize, you'll look back and say they weren't so cheap."
When interest rates are near zero, people are forced to look for other things to do with their investment dollars – like put it into the stock market. On the flip side, when interest rates are high, people will take money out of stocks and put it into interest-earning investments (like bonds).
Buffett doesn't like to make predictions about the economy or interest rates. He prefers to buy great businesses and hold them. However, the interviewer pressed him for his opinion on the future of interest rates...
He waffled a bit on his answer... But my interpretation is that he thinks rates will stay low for a few more years, at least, before ultimately going higher:
After saying that, Buffett said he would bet on higher long-term interest rates in the U.S.
My story – which I have stuck to for years – is that these are not normal times. My story is that the Fed will keep interest rates lower than you can imagine, for longer than you can imagine. And that will drive asset prices (like stocks and real estate) higher than you can imagine.
So far, so good. This story is not over yet.
Even better, our research shows that – even after the Fed starts raising interest rates – stocks will likely continue to power higher (see my research about this here).
Interest rates are incredibly low today. That makes stocks incredibly attractive relative to most other investments. And even when interest rates finally start to rise, stocks can still do well.
The world's best investor – Warren Buffett – gets it. It's all about interest rates and relative value. "Stocks are cheaper than bonds," Buffett says. Therefore, money will flow into the stock market.
You don't need to make it more complicated than that. For now, stick with stocks... in our zero-percent-interest world, stocks are where the value is in financial assets.
Most people don't get this... They see that stocks are expensive based on history. But they are ignoring the fact that interest rates are near zero – making stocks cheap relative to bonds.
Take advantage of this now, before everyone else comes around to this way of thinking...
Good investing,
Steve
Further Reading:
On Monday, Steve shared how he allocates his personal portfolio. "My 'opportunistic investing' has worked out extremely well for me," he writes. "But I worry about telling others what I do." Learn more about Steve's 'opportunistic' allocation strategy here.
And last week, Steve shared why he thinks commodities could be set for huge gains soon. "I'm not in the trade yet," he writes. "But I'm definitely interested." Learn why right here.
Market NotesTHE DOLLAR TAKES A BREATHER Today's chart shows that the U.S. dollar has taken "a breather"... And DailyWealth readers shouldn't be surprised.
Beginning last July, the U.S. dollar rose about 25% in nine months... a tremendous move for a currency. But regular readers know that markets tend to behave like runners. They can't sprint all out for miles without taking a "breather." And in January, Steve Sjuggerud explained why the dollar's rise was about to hit a snag...
"You see, right now, large speculators have more chips bet on the U.S. dollar than any time, ever (yes, ever), based on the latest Commitment of Traders report from the U.S. Commodity Futures Trading Commission. And U.S. dollar sentiment is at its highest reading ever (yes, ever), according to Jason Goepfert's excellent SentimenTrader.com. In short, the U.S. dollar is extremely close to a peak, if we are not already there."
As you can see below, Steve's analysis was solid. Since March, the U.S. Dollar Index has lost about 5%, and just reached its lowest level since February. The uptrend is now broken. Traders take note... the dollar's rise has stalled, at least for the short-term.
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