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Record-Low Rates Here to Stay? What to Do Now...

By Dr. Steve Sjuggerud
Friday, August 13, 2010

As I write, interest rates are at record lows...
Mortgage rates (at 4.5%) are the lowest in a quarter century (as far back as I have data).
Here in the United States, companies and the government can borrow at the lowest interest rates since we went off the gold standard. It's great for borrowers, but terrible for retirees earning interest.
Could interest rates go lower? Yes! Could they stay low for a long time? Yes!
So what should you do? I'll show you...
You might think rates couldn't go lower than they are today... After all, we've never seen them this low in our lifetimes. And you might not imagine rates will stay this low for a long time, with all the government stimulus and "money printing."
But the Japanese faced the same thing in the early 1990s... Here's how it played out:
In 1995, the Bank of Japan did the unthinkable... and cut interest rates below 1%. Today, 16 years later, Japanese interest rates are STILL below 1%.
In the early 1990s, Japan was struggling to recover from an extraordinary real estate bubble (like we are today). Residential real estate prices there peaked in 1991.
The Japanese government threw everything it could at the problem – it cut interest rates to zero and it went crazy borrowing and spending to try to keep the economy afloat.
We are doing those same things today in the U.S.
You could easily argue these things didn't work in Japan... Today – two decades later – Japanese real estate prices and stock prices are still well below their peak.
Meanwhile, with interest rates below 1% for all this time, retirees in Japan earn next-to-no money on their savings. And the massive government debt is still there – it still has to be paid back, somehow.
Japan's government debt is now at a crushing level... near 200% of the economy (GDP). That's the highest in the world, except for basket case Zimbabwe.
The U.S. isn't nearly in Japan's kind of trouble... yet. But the U.S. is heading down the same road. The Congressional Budget Office forecasts government debt will hit 180% of GDP by 2035.
So could interest rates in the U.S. stay below 1% for 16 years? Absolutely.
In the U.S., rates went below 1% back in 2008. It is now 2010. And there is nothing on the horizon that suggests rates will be going up.
The economy is not recovering as much as hoped. Interest rates will stay at record low levels until the economy shows signs of coming back to life and inflation starts to appear. We're not seeing those signs yet.
What can you do? How can you earn income in a zero-percent world? Even on a million dollars, zero percent interest is still zero dollars in income.
We've offered up many ways for you to make high income in DailyWealth... Our favorite way has been through what we call "virtual banks" – like Annaly (NLY) and Hatteras (HTS). My colleague Tom Dyson offered up more of our strategies in a recent DailyWealth, including tax-lien investing, covered calls, and others.
All of these ideas are definitely outside of the norm. But when the norm is zero percent (give or take), you HAVE to force yourself do something outside the norm.
You can hope that the interest rates on your savings will go up. Your hope might come true. But in the meantime, hope isn't going to pay the bills. You can't plan on hope.
Instead, you're going to have to consider outside-the-norm strategies, like the ones we've shared with you this year.
Unless you want to live on nothing, you must roll up your sleeves, do your homework, and act. Tom and I are doing our best to help you... to share our best ideas for earning high-yields in a zero-percent world. And we'll keep doing it.
But it's up to you to act. Do your homework and get started.
Good investing,

Further Reading:

If you're worried your investment strategy is out of the norm... if you're afraid your neighbors will laugh... if you're drawing blank stares at cocktail parties... you're probably doing the right thing. For confirmation, read this: Supreme Investing Confidence: How I Got It and How You Can Too.
And don't miss Tom's August 2 DailyWealth. He's got four outside-the-norm strategies for earning income in a zero percent world. You can find it here: The Gov't Has Declared War on Savers. Here's How to Fight Back...

Market Notes


Despite weak job numbers, weak earnings, and recent stock market weakness, today's chart says it's still a bull market in cigarettes.
We often poke fun at faddish investment ideas like solar and wind stocks. Instead of chasing these ideas, we say focus long-term investment in dominant businesses with fat profit margins and excellent brand names. Focus on stocks like the world's biggest cigarette maker, Altria (MO).
We've written bullishly about cigarette comanies many times in DailyWealth (check out a few pieces here and here). While it's easy to understand Marlboro's incredible brand power, most people don't understand the government loves it when folks buy Altria cigarettes. The government is even more addicted to the huge taxes it collects from Altria than Altria's customers are addicted to its product.
This addiction produces the chart you see below... the past 12-month's action in Altria shares. While stocks around the world have sold off in the past week, Altria has climbed to a new 52-week high, all the while kicking off huge dividend payments.

Altria: It's still a bull market in cigarettes

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