“Summer of shocks.”
That was the headline from CNBC a few weeks ago covering the results of a survey of institutional investors.
It really stuck out to me.
It’s practically the “Get ready for more volatility” non-prediction prediction that always turns out to be right.
Stocks are volatile. Water is wet.
There is, however, a perceived heightened volatility and, if you connect all the dots early enough, you can get in on the assets classes it’s going to drive significantly higher in the months ahead.
How Low Can You Go?
All of the recent volatility has driven investors into bonds.
Bond prices have surged around the world and interest rates have dropped to unprecedented lows.
As I write, the yield on the benchmark 10-year U.S. Treasury Bond is 1.38%.
That’s low. The lowest in 50 years.
At the height of the financial crisis, the 10-year yield only fell to a then unthinkable 2.04%.
Today it’s much lower than that.
Here’s the thing though, it could (and probably will) head even lower.
Other advanced countries’ long-term government debt interest rates are much lower.
The yield on the German 10-year bond is actually -0.18%.
The yield on the 10-year Japanese bond is -0.27%.
The way things are going, the yield on the 10-year U.S. Treasury bond will get there too.
As it marches lower, it will drive the value of certain asset classes significantly higher.
If you bought and held the Japanese bond, you know you’re going to be receive a net 97 cents on the dollar in 10 years.
A dreadful return by any measure. But it gets worse.
Once you add inflation the mix, you’re going to lose 20% to 30% of the purchasing power over that time.
It’s madness. It makes no sense. It’s a sign everything is upside-down. And it means some bull markets have a few more legs left in them.
Good, Better, Best
When interest rates are insanely low, the price of certain assets soars.
Assets that produce high rates of cash flows do well in these environments.
For example, utility stocks have had their best run in years over the last couple of months as interest rates have collapsed.
Their safe, consistent, and (relatively) high dividends have become even more dear to investors looking for conservative income streams.
Real estate tends to do even better. The cost of borrowing is lower, installment payments are lower, and buyers can pay a higher price with the same monthly debt payment.
As a result, Real Estate Investment Trusts (REITs) have been a bright spot.
The best has been and will likely be gold.
We went over a couple months ago how falling interest rates propel gold prices higher.
If the interest rates in the U.S. are headed to where they are for German and Japanese government debt, gold’s going to $2000 or higher.