Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Don’t Expect a Life Vest to Save You from Low Interest Rates

Personal_Finance / Savings Accounts Oct 02, 2014 - 09:02 PM GMT

By: Don_Miller

Personal_Finance

Touring the Alamo, presenting on how retirees can succeed in a crisis economy, and picking the brain of one of the world’s top economists, Dr. Lacy Hunt, about the future of low interest rates were among the highlights of my recent trip to San Antonio for the Casey Research Summit. In addition to authoring two books and countless articles for leading financial publications, Dr. Hunt is executive vice president of Hoisington Investment Management Company, a firm that manages $5.4 billion.

Lacy is also a favorite speaker of mine because in addition to being a terrific economist capable of running rings around the likes of Alan Greenspan, he can relate the big economic picture to average investors. He rates very high on the common-sense scale—a good philosophical fit for the Miller’s Money team.


Now, let’s find out what Dr. Hunt sees on the horizon for interest rates.

Dennis Miller: Lacy, thank you for carving out time to talk. Many baby boomers and retirees have borne the brunt of the bank bailouts. Interest rates are far below their retirement projections, and they’re hoping the good old days of 6% CDs and the like will come back quickly. Lacy, this started eight years ago. What would you say to folks looking for high yield rates on top-quality, fixed-income investments to return to “normal?”

Lacy Hunt: My pleasure, Dennis.

Interest rates are unlikely to normalize for several years or even longer. The low interest rates are a reflection of the overleveraged condition of the US economy, which is severely constraining growth. Long-term high-quality yields such as 30-year Treasury bonds are likely to decline in yields over this period as inflation eases.

Dennis: When planning for retirement, many baby boomers anticipated 6% returns and inflation under 2%. Those were conservative estimates. If interest rates are going to remain low, which I too believe is the case, this will continue to force boomers to risk more money in the market or change their retirement lifestyle.

People looking for some sort of yield and income have flooded the market with money. What do you see in the market’s future over the next five years or so?

Lacy: This is a time for caution concerning the stock market. I would recommend highly conservative investors who cannot rebuild nest eggs with earnings from employment remain on the sidelines until the risk of another recession is resolved. The stock market gains are being fed by excess liquidity rather than an improvement in corporate earnings. Such imbalances have historically led to swift downdrafts in the price of risk assets.

One way to protect risk assets bought for yield in this environment is to balance them with a partial holding in long-term US Treasury bonds. T-bonds are negatively correlated. If risk assets continue to do well, then Treasury holdings will limit the upside gain; but in the event that risk assets falter, T-bonds will limit downside losses.

This is not the time to shoot for the roses. I realize a lot of retirees have to invest in the market for income during this cycle, but you need to be very careful.

Dennis: In your San Antonio presentation, you said something to the effect of “When ‘buy now and pay later’ is your philosophy, eventually ‘pay later’ overwhelms the system.”

Lacy, anyone who has high credit card debt, student loans, and/or an abundance of monthly payments eventually has to come to grips with that situation and change his ways. You pointed out that not just the United States government, but also the rest of the world has astronomical debts growing at an alarming rate. How do you see this unfolding, and what are the investment implications for baby boomers and retirees?

Lacy: Extreme over-indebtedness for economies results in a number of critical symptoms: poor economic growth in comparison to the historical norm; the business cycle operates but in a much more muted fashion; inflation falls to abnormally low levels, and in many instances, the result is deflation; due to poor growth, demographics deteriorate; and long-term Treasury bond yields, which are heavily influenced by inflation, fall to historically low levels and remain depressed until the over-indebtedness is corrected. Also, the low inflation environment persists for a long time.

All of the major economies are experiencing the effect of “pay later” overwhelming “buy now,” and these symptoms are all too evident in the global economy.

As I mentioned earlier, if you have to be in the market for income, you need to be very careful and have a good exit plan.

Dennis: One final question. I often hear from Miller’s Money subscribers who really feel caught in the middle. They want the safety of top-quality, fixed-income investments, but they need better yield in order to supplement their other retirement income.

What tips might you have for folks who find themselves in that position?

Lacy: We believe there are opportunities for excellent returns in long-term US Treasury coupon and zero-coupon bonds. We have our accounts with a 20-year duration, which is a very aggressive stance and a very uncommon strategy. The returns will be caused by appreciation in the value of these bonds in the difficult business environment ahead. However, this path will be very volatile, and investors will require patience.

Due to this volatility, investors should include holdings in long-term Treasury bonds as part of a diversified portfolio. If the bull run in stocks continues, the Treasury bonds will too, reducing the upside gains. However, in a bear market, holdings of Treasury bonds will limit the downside risk of the total portfolio.

I would caution everyone to work with a bond professional, though. When to buy and what types and amounts is not something the average stockbroker really understands.

Dennis: Lacy, as always, thank you so much for your time and insight.

Lacy: My pleasure, Dennis.

San Antonio’s biggest highlight was the chance to meet and shake hands with Miller’s Money Weekly and Miller’s Money Forever subscribers. For more expert interviews, timely financial commentary and need-to-know economic news, sign up for our free, weekly e-letter here. And follow us on Twitter ;@millersmoney.

The article Start Swimming or Drown: Don’t Expect a Life Vest to Save You from Low Rates was originally published at millersmoney.com.

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.

Casey Research Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules