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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Why I'm NOT Betting on Higher Interest Rates

Interest-Rates / US Interest Rates May 14, 2013 - 04:44 PM GMT

By: DailyWealth

Interest-Rates

Dr. Steve Sjuggerud writes: Bill Gross is the world's greatest bond investor. But I'm not betting on his latest market call... And you shouldn't either.

Gross is to the bond market what Warren Buffett is to the stock market...

Just like Buffett, Gross has managed to trounce his peers for decades even as his assets under management have grown to an incredible size. Gross' firm PIMCO now manages over $2 trillion in assets, making it the world's largest bond investor.



If you had invested $10,000 in Gross' bond fund at inception in 1987, you would have nearly $80,000 today. Remember, these incredible gains were in "boring" bonds – not in stocks.

But Gross says the fun in bonds is now over... On Friday, he wrote on Twitter that the "30-yr bull market in bonds likely ended 4/29/2013."

When the Bond King speaks, I listen... It's hard to argue with his track record.

But in this case, I will argue...

Personally, I'm not betting against bonds... at least not yet. Here's why...

We're in a unique moment in history – we're seeing a "mini bubble" in central bank powers.

In short, investors believe central bankers – like Ben Bernanke from the U.S. Federal Reserve – have incredible powers to manipulate markets... Investors believe that central bankers can make bond prices go up or down at will.

As long as investors continue to believe that, it becomes true – a self-fulfilling prophecy.

The thing is, it's not true... Investors as a whole can move dramatically more money than any government or central bank can. And someday, they will realize that. They'll shift their thinking. And that is when interest rates will finally soar.

But I think that day could be a long way away...

Central banks can fool people for a very long time, keeping interest rates very low for a very long time... and causing crazy booms in stocks and real estate.

Japan is an interesting example of what I mean...

In Japan, interest rates on government bonds are below 1%. And stock prices are soaring. Yet relative to the size of its economy, Japan has much more government debt than the U.S. does.

The Japanese government and Japan's central bank have successfully fooled the people of Japan. The bond market has not crashed. And the stock market has soared.

Bill Gross may be right. The 30-year bull market in bonds may have ended on April 29. He should know – he knows bonds better than anyone on the planet. But I'm not putting any chips on the idea of a bond-market bust.

Just to be clear, I'm not betting in favor of bonds either...

Instead, my chips are on the idea that central banks will be able to fool investors for years and keep interest rates low.

In that situation, the right trade is to be in stocks and real estate.

Good investing,

Steve

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

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