Financial / Investing / Private Equity / Saving for retirement / US Government / US Markets / Wealth

Sometimes, you don’t need a crystal ball

ImageAs investors and professionals alike argue when the Fed will finally taper their bond-buy program, the culprit of artificially low-interest rates, please understand that the market waits for no one.

Even though the Fed hasn’t budged on their message or actions, the market has begun to move in anticipation of the inevitable. In the summer of 2013, the 10- year U.S. bond was yielding 1.6%. Today its yield is 2.8% and has been as high as 3%. What is most important to realize is that it could go as high as 5% and still be considered normal, or even accommodative.

I have written extensively, trying to get the point across to my members and followers that we must look ahead. Like a chess game, the victor will be the player who anticipates 3…5…even 7 moves ahead. One cannot react (see my “Rubber Band” post). The market anticipates and builds the likely future scenarios into its price. That’s why many times a stock price will fall on good news. It’s a classic in the business, known as “buy the rumor and sell the fact.”

With interest rates at record lows (probably a “once in a generation event”), one must position themselves for the rising rates. The evidence is there: Seven-year Treasury notes attracted the least demand since May 2009 and after solid two- and five-year sales on speculation, the Federal Reserve is moving closer to reducing bond purchases next month.forest

If you don’t believe higher interest rates will come or think that they will go lower for a sustainable period of time, you are either Japanese or under a rock (if a crisis happens, people could run temporarily to bonds for safety, but barring this, they won’t). The Japanese went through 10 years of stagflation where nothing happened. I don’t think that’s the case with the U.S. economy. Contrary to the culture of Japan, Americans, and Westerners for that fact, are consumers. I think 10 years of saving would put everyone into the “loony bin.” But you know the saying, “sometimes you are so close that you can’t see the forest through the trees.”

So how do you take advantage of this uncontrollable opportunity?

My suggestions are:

  • Pay off every high interest rate card you can, even if you have to borrow. The chances are you can borrow at a rate lower than you are paying.
  • Borrow now! If you need a car, house, or any big-ticket item, now is the time!
  • Investments should be chosen where they participate with higher rates. This includes ETF’s (exchange traded funds) that appreciate with higher rates.
  • On debt, have as long of a horizon as possible (to pay) if you are placing money into fixed rate deposits, do NOT commit to any long periods of time.
  • Realize that it will take stocks a while to adapt. Initially they will be fearful, but will eventually realize that normalcy is good and that we are not in normalcy. Be aware of this and patient.

One day, we will look back at these times.

I only pray that you aren’t saying, I wish I would’ve, could’ve, and should’ve!”

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