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Thursday, January 12, 2012
This week, interest rates in Germany fell BELOW ZERO.
It's true... If you bought a six-month government bond in Germany earlier this week, you'd have to PAY THE GERMAN GOVERNMENT interest.
Unbelievably low interest rates are not just a German problem...
Interest rates are near zero in the world's major developed economies... In Japan, short-term government bonds are paying 0.1% interest. And short-term government bonds in the U.S. are paying 0.01% interest.
In short, it is definitely a zero-percent world today. The question is, how long can it last?
The answer is... a very long time.
If you need interest income, you don't want to know how long interest rates could stay near zero.
I've written about this possibility a lot in recent years...
Back in December 2008, I wrote a DailyWealth titled "Are 3% Mortgage Rates on the Way?" At the time, it sounded preposterous... Mortgage rates spent most of 2008 in the 6%-6.5% range. Now here we are, with mortgage rates at 3.9%.
Six months ago, I wrote another essay on the topic. It showed how we could eventually see mortgage rates drop in half. At the time, U.S. Treasurys, which influence mortgage rates, were paying 3% interest. Today, they're paying 2% interest.
I've updated a chart from that DailyWealth showing how U.S. interest rates are at record-lows... But they could go lower, based on Japan's historical example.
In the chart, I pushed Japan's interest rates forward by a decade, to compare their path to ours.
Japan faced its "lost decade" one decade before we did. And its government attacked the problem the same way our government has in the United States, with dramatically lower interest rates and dramatically increased government spending.
Twenty years later, Japan's economy is still not growing. It still has extremely low interest rates. And thanks to all the government spending, Japan now has the world's highest ratio of government debt-to-GDP. (Ominously, Japanese real estate has not started a recovery, either.)
Back here in the U.S., you can hope that interest rates go back up so that you can once again earn income on your savings.
But hope is not an investment strategy.
I personally believe that we have a lot of incredible investment options right now, because of this zero-percent interest policy around the world. But holding cash at the bank and hoping for higher interest rates is not one of those options.
We could have zero-percent interest rates for another 10 years. Japan is proof. And the world is currently following Japan's example.
Interest rates have been at zero since late 2008. It's now 2012. And the Federal Reserve seems committed to keeping them at zero "for the foreseeable future."
Can you deal with zero-percent interest for years going forward? If not, what are you doing to change your strategy?
My goal in 2012 is to find ways to take advantage of this extreme zero-percent world for my True Wealth subscribers. I will share many of those ideas here in DailyWealth as well.
But it is on you... If you're relying on income, you need consider the reality that interest rates might not go up for longer than is comfortable for you.
You can hope for them to go higher. But you need to do more than hope. You need to make changes...
Several DailyWealth and Growth Stock Wire editors have recently shared a few ways to beat the market in a zero-percent world...
Relative to just about anything you can put your money into right now, this investment is a steal.
"If you count the dividends, the 'buy and hold' crowd managed to eke out a 1.5% return for the year," Jeff Clark writes." But by following his advice, "you could have made anywhere from 7% to 35%" in 2011. And he expects that to ring true this year, too.
"If you do it right, you won't actually buy many stocks," Doc Eifrig says. "You'll simply collect premiums and earn about 15%-30% a year on your capital."
ONE OF OUR FAVORITE "TROPHY" STOCKS IS SET TO BREAK OUT
One more potential "breakout" for the contrarian traders out there...
In yesterday's edition, we noted how beaten-down transportation stocks staged an important multi-month price breakout this week (along with small banks, defense, and homebuilder stocks). We're attracted to this "beaten down, but showing a bit of price strength" setup because it gets us into cheap, out-of-favor assets. The preceding selloff "wrings out" most of the downside risk... and leaves us with lots of potential upside.
Another beaten-down sector showing signs of life is the "trophies" of the natural resource complex... companies like Freeport-McMoRan (FCX). We call Freeport a "trophy" because it's the world's largest public copper company. It controls the giant Grasberg mine, which is the world's largest gold mine and third-largest copper mine. It is one of the "jewels" of the resource industry.
Like most assets, Freeport was hammered during the second half of 2011. Shares fell from their summer high of $55 to a low of $30 (a 45% drop). But as you can see from the chart below, this "trophy" stock has bottomed... has strung together a bullish series of "higher highs and higher lows"... and has just cleared its December high. Should the global markets continue to get "less bad," it's a chip shot back to its summer level of $50.
In The Daily Crux