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Investment Legend: 'Interest Rates Have Bottomed'

By Dr. Steve Sjuggerud
Monday, October 10, 2016

"This is a big, big moment," Jeff Gundlach said earlier this month in a webcast for his clients. "Interest rates have bottomed."
Gundlach is the founder and CEO of the investment firm DoubleLine Capital. He earned the nickname "Bond God" because his track record and prognostications have been extremely good in recent years.
But is he right? Did interest rates really bottom? Is this a big, big moment?
I believe he could be right. The ultimate bottom for interest rates could be behind us. But it's important to understand that predicting interest rates is tough.
Let me explain...
Gundlach has certainly earned his nickname. He has been right more often than "Bond King" Bill Gross in recent years.
But before you buy into his idea, consider this: This isn't the first time you've heard an "expert" say that interest rates are headed higher, right?
Since 1981, we've been threatened with the fear of higher interest rates from "experts" every year...
"Better act fast," your friendly realtor/banker/financial planner tells you. "Interest rates are going up any day now."
Your local experts were well-intentioned, I'm sure. But they were wrong. Interest rates have fallen relentlessly for 35 years.
Don't feel bad about it... Everyone believed along the way that higher interest rates were just around the corner.
So... let me ask you, if the "experts" have gotten it wrong, why should we trust Gundlach now? What could cause interest rates to spike from here?
A lot of things, actually. His theory is that, regardless of who wins the presidential election in November, government spending will soar...
From his recent webcast...
Hillary Clinton's Infrastructure Plan: "As President, Hillary will launch our country's boldest investments in infrastructure since the construction of our interstate highway system in the 1950s." $275 billion, five-year plan...
Donald Trump's Economic Vision for Infrastructure: "28% of our roads are in substandard condition and 24% of bridges are structurally deficient or worse. Trump's plan will provide the growth to boost our infrastructure... "

All that government spending requires government borrowing – and that means a lot more bonds. As more government bonds are issued, that will push down their prices... which means higher interest rates.
More important, the current bond market situation is "overly loved."
Investors recently placed their largest bets in 18 years on lower interest rates. (You have to go back to 1998 to find a time when speculators had a larger "long" position in 30-year Treasury bond futures than they had recently.)
Typically, when bets reach an extreme, the trend is nearing an end, and the opposite tends to happen.
So... what happened after 1998 – the last time investors placed huge bets on lower interest rates?
Interest rates bottomed out soon after... They went from 4.7% in late 1998 to a peak of nearly 6.8% in early 2000. We saw a similar instance in 2012 – though not as extreme – with similar results.
The point is that while making interest-rate predictions is hard, the facts back up the case this time.
The "Bond God" believes the bottom in rates is behind us. And I agree.
Good investing,

Further Reading:

Not long ago, Steve introduced the idea of betting on higher interest rates. "During similar extremes in the past, interest rates have typically shot higher over the next 12 to 18 months," he wrote. For more on how to tell when it's time to pull the trigger, read it here.
"If you're four years early, you're not early. You're wrong," said master resource investor Rick Rule. Timing market moves is difficult. And it depends on knowing the difference between two key things. Get the full story here.

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