{"id":56857,"date":"2014-08-15T02:44:40","date_gmt":"2014-08-15T06:44:40","guid":{"rendered":"http:\/\/countingpips.com\/?p=56857"},"modified":"2014-08-15T02:44:40","modified_gmt":"2014-08-15T06:44:40","slug":"the-chart-that-proves-the-low-interest-rate-era-is-alive-and-well","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/08\/the-chart-that-proves-the-low-interest-rate-era-is-alive-and-well\/","title":{"rendered":"The Chart That \u2018Proves\u2019 the Low Interest Rate Era is Alive and Well"},"content":{"rendered":"
August 15, 2014<\/div>
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By MoneyMorning.com.au<\/u><\/a><\/p>\n

Raise your hand if you really<\/em> think interest rates<\/strong><\/a> are about to go up.<\/p>\n

We’re sorry to keep going on about boring old interest rates.<\/p>\n

But it amazes me that so many folks still think central banks are about to pull the trigger on rate increases.<\/p>\n

We just don’t see it happening.<\/p>\n

In fact, we’ll go further — it won’t<\/em> happen. If anything, the trend isn’t up…it’s down…<\/p>

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In a moment we’ll show you a remarkable chart.<\/p>\n

Some may think this is an exaggeration, but we’ll go so far to say that it’s one of the most remarkable charts we’ve seen…at least in the past 10 years.<\/p>\n

If you think the chart of the 2008 stock market crash is frightening, you’ve seen nothing. During that crash, the US stock market halved in value.<\/p>\n

But how would you like a market (another ‘blue-chip’ market) that has effectively fallen 71% in value over the past three years?<\/p>\n

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A shocking chart<\/strong><\/h2>\n<\/p>\n

We’ll show you the details of this horrific market in a moment. First, check out this report from the Financial Times<\/em>. This is what alerted us to the chart:<\/p>\n

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‘The German economy contracted by 0.2 per cent in the second quarter while France stagnated.<\/em><\/p>\n

‘The 10-year German bund yield is down 1bp to 1.02 per cent, having earlier hit 1 per cent for the first time, while Berlin’s 2-year implied borrowing cost sits at minus 1 basis point, reflecting expectations that the European Central Bank will have to adopt further stimulus measures to boost growth.<\/em>’<\/p>\n<\/blockquote>\n

(By the way, one basis point — 1bp — is another way of saying 0.01%.)<\/p>\n

You can bet they’ll have to adopt further stimulus measures.<\/p>\n

And you don’t need to be a Harvard PhD either to work out what those measures will be.<\/p>\n

Why, it will mean low interest rates<\/a>…for a long, long time.<\/p>\n

Here, let’s show you the chart that shows a 71% drop in ‘value’ over the past three years:<\/p>\n

<\/a>
\nSource: Bloomberg<\/em>
\nClick to enlarge<\/a><\/em><\/div>\n<\/p>\n

The above chart is the German 10-year bund yield. It shows the yield falling from 3.5% in 2011 to 1% today. That’s a 71% drop in the value of the bond yield<\/a>.<\/p>\n

Put another way, investors who bought a 10-year German bund could have got €350 a year in income for every €10,000 invested. Investors who buy 10-year German bunds today will only get €100 a year in income for every €10,000 invested.<\/p>\n

How do you like that for a ‘wage cut’?<\/p>\n

Is it any wonder that investors around the world are looking elsewhere for yield?<\/p>\n

It’s no wonder at all.<\/p>\n

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Better than blue-chip stocks<\/strong><\/h2>\n<\/p>\n

This is all part of the reason for the hunt for yield.<\/p>\n

It’s happening in Germany. It’s happening in the US. It’s happening in the UK.<\/p>\n

And it’s happening right here in Australia.<\/p>\n

It’s helping push share prices higher. It’s a big reason why stocks like Commonwealth Bank of Australia [ASX:CBA]<\/strong> are trading near record highs.<\/p>\n

In Australia the search for yield started in earnest in 2012, when the Reserve Bank of Australia<\/a> (RBA) began signalling that it would cut interest rates.<\/p>\n

That pushed stock prices up and dividend yields down.<\/p>\n

It’s exactly why, since then, we’ve advised investors to hold a good amount of their investable wealth in dividend-paying stocks. And not just blue-chip dividend payers either.<\/p>\n

Some of our favourite dividend payers are small-cap stocks<\/a>, such as a small-cap medical company that continues to raise its dividend as profits grow. Investors who bought at the original recommended buy-up-to price of 23 cents just over a year ago are now sitting on a gain of 170%, including dividends.<\/p>\n

Investors who bought into the boring small-cap property stock housing one of Australia’s most popular retailers are now sitting on a 67.4% gain<\/a> (including dividends), while the blue-chip S&P\/ASX 200 index has only gained 18.5% over the same time.<\/p>\n

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There’s no way this is ending<\/strong><\/h2>\n<\/p>\n

The important thing to understand is that this trend of looking for dividend-paying stocks isn’t over.<\/p>\n

With German 10-year bond rates at 1%, do you really think it’s likely that investors will plump for that yield instead of buying stocks?<\/p>\n

It just doesn’t seem logical at all.<\/p>\n

Sure, there will always be a demand for government debt<\/a>. Pension funds and insurance firms like the supposed guarantee of government bonds.<\/p>\n

But even they can only cope with low rates for so long before they look for better yields somewhere else. That’s where stocks enter the frame, and of course, the exotic derivatives that we mentioned earlier this week.<\/p>\n

This all goes to show you that it’s too early to talk about central banks raising interest rates. Low interest rates and cheap money are helping to fuel the boom. As long as the world’s economy needs it, central banks will keep rates low.<\/p>\n

And that can only be good news for stocks.<\/p>\n

As we’ve long said, we may not agree with these policies, but it’s foolish not to take advantage of them while we can.<\/p>\n

Cheers,
\n Kris+<\/a><\/strong><\/p>\n

Join Money Morning on Google+ <\/u><\/a><\/strong><\/p>\n

The post The Chart That \u2018Proves\u2019 the Low Interest Rate Era is Alive and Well<\/a> appeared first on Stock Market News, Finance and Investments | Money Morning Australia<\/a>.<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nBy MoneyMorning.com.au<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Raise your hand if you really think interest rates are about to go up. We’re sorry to keep going on about boring old interest rates. But it amazes me that so many folks still think central banks are about to pull the trigger on rate increases. We just don’t see it happening. In […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-56857","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/56857","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=56857"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/56857\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=56857"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=56857"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=56857"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}