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Where Will Your Portfolio Be When the Interest Bull Run Ends?

Jan 04, 2020 | Kevin Troy |

Where Will Your Portfolio Be When the Interest Bull Run Ends?

Almost 40 years. That’s how long the bull run in interest rates has lasted so far. During this time, the Federal Reserve has lowered its Funds Rate from almost 20% in 1981 to just under 2% today.

An image showing the Federal Reserve funds rate from 1955 to 2019.

Where do rates go from here? They could go lower, but there isn’t much room left to do so, which means rates would go into negative territory. If they were to creep below zero, it would be a clear sign that our central banks has lost all credibility and that our economy is in serious trouble. In this scenario, gold would probably soar. More likely, rates will stay put or increase. Since what goes down must eventually come up, rate increases are expected.

Former Fed Chairman Alan Greenspan has been sounding the alarm bells, warning that the bond market is in a bubble about to pop. The greatest risk to the global economy, he says, is surging interest rates, which would lead to stagflation (an extended period with inflation and low GDP growth). That could look like the 1970s, which dragged the economy through serious recessions. The decade saw persistent low GDP and spiking inflation. In 1977, gold was priced at just $150 per ounce; by 1980, it had soared to $800 per ounce.

On Wall Street, there are no investors who have lived through an environment with rising interest rates. They are used to rates just going down. Interest rate cycles can last for a long time—the current one is approaching 40 years and was preceded by a 22-year cycle where rates surged from 2% to 20%.

According to Greenspan, the current cycle will reverse in the next few years. And when that happens, not only the bond market—which is heavily reliant on low rates—but also the stock market will suffer terribly. Both markets are characterized by huge bubbles.

This is why investors are facing an investing dilemma today. Stocks and bonds are both way above their historical norms, and stocks are way overvalued. Holding both types of equities as diversification may not be a strategy that makes much sense these days since these paper assets are more correlated than ever. Most investors follow the Wall Street way, which could turn out to be the worst strategy.

With both stocks and bonds being more overvalued than ever before, and with their strong correlation, how can you diversify your portfolio? The answer for tough economic times has been the same for over 5,000 years: gold. Investors that held gold in the ’70s saw a return of multiples on their investment, and if indeed we are heading into times that are resembling the ’70s, “gold will be the asset of the next decade,” to use a recent quote by Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund.