Riding against the bond-selling herd
Oct 10, 2013 @ 12:00 am
Why Robert Kessler, CEO of Kessler Investment Advisors, sees lower interest rates prevailing
This week on WealthTrack, Great Investor Robert Kessler explains why he is standing firm while others stampede out of U.S. Treasury bonds. Riding against the bond selling herd is next on Consuelo Mack WealthTrack. I began our conversation by asking Kessler about his recent report titled, "Nothing has changed," in which he predicts, "The secular trend of lower interest rates will continue and interest rates will eventually fall to new lows." -I was on the show last July, August, and if you look at today's market versus last year's period of time, we have GDP that's substantially lower than the GDP last year. We have inflation that's substantially lower than last year. We seem to have a huge number of people that are unemployed or underemployed, even more people on food stamps, and this division in the country that if anything has gotten wider and the process that we've been in, we'd like to make it three or four years like it is, but it takes a long time in a credit recession like we've had where debt has to be de-leveraged, debt has to be paid back before there's enough money to create the demand to move markets. And so, every time we've had a QE, some sort of stimulus-- -Right. Quantitative easing stimulus [unk] -Quantitative easing, some sort of stimulus on a monetary basis. Every time we've had one as we got to the end of it, we suddenly had interest rates going down and we had economies that suddenly weren't doing what people thought they would do which is to improve. And in that process, we've kind of ratcheted rates lower and lower and lower. And it would appear, if we look honestly at the economy right now, that things really don't appear that much better, but for one main reason, different than last year and that is that we have a global marketplace. We had Europe with 12 percent unemployment, unheard of number really. We have commodity markets that are heading down because there isn't any demand in the global marketplace. We have the fear of China which is a bigger fear that China slows down. So, all of these things continue this process of either de-leveraging or paying down debt and we also have governments that don't wanna do very much-- -Uh-huh. -from the fiscal side. So, when we write a piece like this-- -That nothing has changed, right? -that nothing has changed in many ways. Things have changed, but they haven't gotten better. And because they haven't gotten better, the history of these kinds of markets and we have to look at it period by period, we can't look at the '80s and '90s and say, "Well, the average rate of treasuries was 6 percent during the last 25 years." The fact that it matters that sound a good period of time to look at. We should look at the '40s and '50s. That's 10 years after a credit recession, a terrible depression in the United States. In the '40s and '50s, we never saw our interest rates much higher than 2.5 percent. So, this idea, we're gonna go back to normal or normalcy at 4 percent or 5 percent or 6 percent because that's what we think is normal, it becomes a little silly. -So, one of the things, of course, that, you know, you are one of the few people that is saying in fact that the 10-year Treasury is probably gonna go back and test it. It's almost a 1 percent. -Ten-year treasuries tend to yield just about 1 percent over the cost of money which happens to be zero. So, if you don't accept 1 percent-- -Right. -go to the next step. Then-- Actually, 10-year treasuries on balance have yielded about 1 percent more than the inflation rate. It's what they do. Now, the inflation rate happens to be some place around 1.5 percent, so you could say, "They should yield 2.5." That's reasonable too. -Uh-huh. Uh-huh. -But for very long periods of time, the 10-year Treasury yields about 1 percent less than those rates. Okay, that would be in the 1 percent range then. So, there's lots and lots of things that people can point at and say this is where they've been, but the most important thing has to be-- So, tell me if there's any demand out there for money. You and I were talking a little bit about money earlier. -Right. -And money is fascinating to me. Cash is the most interesting facet, I think, of this market. And the reason I think cash is so interesting is because Wall Street, the sell side of the business, tells everyone, "You cannot keep cash because you're gonna be losing money because inflation will eat into it." -Right. You're gonna lose your purchasing power. -You're gonna lose your purchasing-- -Cash is trash. [unk] -Cash is trash. And this makes actually no sense, especially during this period of time for this reason. A lot of smart money and we all have a tendency to say, "Corporations are very smart because they are sending with $2 or $3 trillion in cash. -Right, record levels of cash. -I don't notice them doing anything with it. They're not organically growing because there's not enough demand to go build a factory to sell something so-- to keep the cash and they don't wanna buy another company because that's not gonna improve their bottom-line too much. Certainly, it won't improve their revenue as much if the demand doesn't pick up. So, they keep this cash and everyone says, "Why do they keep this cash?" I suspect they keep the cash because they think something will be cheaper later on. There was an interesting study that came out today that said that rich people, very well-to-do wealthy people, are keeping more cash than they ever kept before. So, if all these things look so good, that we're being told we have to go out and buy,-- -Uh-huh. -why are all these very smart people keeping all this cash and my guess is that they expect to be able to buy something cheaper at a later date and that is deflationary.
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