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A New Record Is Set... And It Is ForebodingBy
Friday, August 15, 2014
A new record was set in Germany yesterday...
The interest rate on a 10-year government bond in Germany fell below 1%.
This number is shocking... Interest rates have never been this low in German history.
What does it mean?
Why would people agree to lend money to a government for 10 years with almost no return on that money?
What is the message that we should take from this?
Aren't things supposed to be getting back to "normal"? And doesn't "normal" mean something like this: By 2020, the Federal Reserve has short-term interest rates at 4%, and 10-year government bonds pay 5%-6% interest?
This type of "return to normal" is the script on Wall Street and on Main Street.
But that script is just plain wrong if 10-year interest rates in Germany are below 1%...
What we're experiencing is the financial storm that nobody is expecting.
I'm talking about DEFLATION – every central banker's biggest fear.
The guy with the right script here is Jim Rickards...
In his excellent book The Death of Money, Jim says, "The world is witnessing a climactic battle between deflation and inflation."
"It is just a matter of time" before this battle comes to a head, he says. At some point, the U.S. economy will experience "an earthquake in the form of either a deeper depression [from deflation] or higher inflation, as one force rapidly and unexpectedly overwhelms the other."
I have always assumed that inflation would be the eventual winner, as governments can print money. But in his book, Jim makes the case that either one could win. With long-term interest rates now below 1% in Europe, it's looking like Europe is already in an epic battle with deflation.
Could it happen here in the States too?
It could.
Legendary bond investor Bill Gross has also recognized that the world is changing before Wall Street and Main Street have. Bill says we have to prepare for "The New Neutral" as he calls it. He expects interest rates in the U.S. will not soar by 2020 as everyone expects. Instead, Bill Gross (also known as The Bond King) sees the interest rates on 10-year government bonds as range-bound between 2.5% and 4.0%.
The message from the German bond market, from Jim Rickards, and from Bill Gross is the same: Long-term interest rates are likely NOT going back to "normal" anytime soon...
Good investing,
Steve
Further Reading:
Learn more about America's epic battle between inflation and deflation here:
The World's Most Important Financial Battle Is Coming to a Head
The world is witnessing a climactic battle between deflation and inflation... The Coming Death of the Dollar
"The Federal Reserve believes that it is managing a reversible process... [but] it is mistaken." What to Own as the Dollar Dies
If you're worried about a collapse of the U.S. dollar, you may want to start incorporating some of this advice into your portfolio today... Market NotesCHEAP EMERGING MARKETS ARE GOING HIGHER Emerging markets have been volatile... but they're still in an uptrend.
Over the past year, Steve has urged readers to buy emerging market stocks, like those in China, Brazil, and India. These stocks have become some of the cheapest in the world.
An easy way to track emerging markets is with the iShares MSCI Emerging Market Fund (EEM). It's a huge investment fund many money managers buy when they want exposure to emerging-market stocks.
As you can see from the three-year chart below, these cheap emerging-market stocks are experiencing sharp rallies and sharp declines. This volatility is coming with real share price gains, however. The trend is volatile, but it's also UP.
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