"Interest Rates Are Headed Lower" Says The Bond King

"If home prices in the U.S. have peaked... then the Fed will cut rates and cut them significantly over the next few years."

And if that's the case, then we should see "an ongoing bond bull market of still undefined proportions."

The quotes above are from Bill Gross – the world's biggest money manager – written in the latest issue of his Investment Outlook newsletter.

When Bill talks, we listen. Gross manages $700 billion, primarily in bonds. After decades of safely earning double-digit returns, he's commonly known as "The Bond King."

In recent years, Bill has thought the great bull market in bonds that started in the early 1980s had finally come to an end. But given the weakness in the housing market this past year, it appears Bill is changing his tune.

If Bill is right, and a bull market in bonds is here, then we could see yet another leg higher in the stock market. It's all about declining interest rates.

If long-term interest rates fall by 1%, for example, then we would see two things, both of which are good for stocks. 1) Some investors would switch out of bonds and into stocks, looking for higher returns, and 2) the borrowing costs for companies would go down, making them more profitable.

According to The Bond King, the Fed better lower rates sooner rather than later... "The longer [interest rates] stay at current levels, the more downward pricing pressure will build as foreclosures/desperate sellers dominate price trends as opposed to prospective buyers."

He says: "While the Fed may be willing to allow U.S. homeowners to suffer a little pain as indeed they have in recent quarters, a double-digit decline would risk consequences that few central banks would be willing to underwrite."

Bill says the Fed needs to try to engineer mortgage rates down a minimum of 60 basis points (0.6%) in order to prevent double-digit home price declines.

The Bond King's performance of the last few decades has been exceptional. He's had a knack for making the right calls at the right time, and committing big money to back them up.

His current idea is that housing is in trouble... that the Fed will cut rates to ease the pain... which will cause long-term interest rates to fall... which allows the great bond bull market to resume once again. In an environment of falling long-term interest rates, stocks could do well too.

At DailyWealth, we hope The Bond King is right...

Real estate would survive unscathed. Bonds would do very well. Stocks could do well. And our newest recommendation – the virtual banks – would make a fortune if the Fed cuts rates.

If history is any guide, chances are The Bond King will be right again...

Good investing,

Steve