Conventional wisdom says that interest rates will rise, so it makes sense to move away from long-duration bonds and into equities. That wisdom has played out this year, with flows into stock mutual funds and ETFs reaching $45.5 billion in October and $277 billion for 2013 -- both of which are highs since 2000. On the other hand, bonds have seen $140.6 billion of outflow since June.
But what if interest rates don’t rise -- which, according to Robert Kessler, is likely? With GDP and inflation low and unemployment high, as well as debt having to be paid back before cash is put to use to grow the economy, Kessler warns that interest rates could remain low. Add to the mix the fact that we are dealing with a more global economy -- with Europe weak and fears growing about the Chinese economy -- plus a government that is reluctant to act.
Looking at the 1980s and 1990s, experts say that rates have to rise. But Kessler points to the 1940s and 1950s, when interest rates remained low, as a more apt comparison. And why is so much smart money remaining on the sidelines? An estimated $2-3 trillion of cash is being held by corporations that do not see the opportunities to invest in organic growth or make acquisitions.
Many mutual fund managers are hoarding cash as they struggle to find good buying opportunities in a heated equities market. Blackrock’s Larry Fink also warned of a bubble.
When people get greedy, smart investors get fearful. And betting against the investing public sometimes pays off. What’s your take on all this?
