Investors are suffering from “mass psychosis.”
So says Jeff Gundlach, the master investor who manages more than $100 billion at DoubleLine Capital.
Gundlach, as you may know, is one of the world’s top bond experts. Many people on Wall Street even call him the new “Bond King” – an unofficial title that PIMCO founder, Bill Gross, held for years.
During one of his recent webcasts, Gundlach pointed out that rock-bottom interest rates are forcing investors to gamble with their savings to earn decent returns. MarketWatch reported last week:
“There’s something of a mass psychosis going on related to the so-called starvation for yield,” said Gundlach, whose fund manages about $100 billion. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money,” he said.
• Dispatch readers know what Gundlach is talking about…
You see, after the 2008 financial crisis, every major central bank on the planet slashed interest rates to “stimulate” the economy. The idea was that people would spend more money if they could borrow money cheaply.
The U.S. Federal Reserve has now held its key rate near zero for eight years… Europe and Japan have even introduced negative interest rates.
As regular readers know, negative rates basically turn your bank account upside down. Instead of earning interest on your money, you pay the bank to look after your money. In other words, negative rates penalize saving and encourage spending. Idiotic government officials thought this would grow the economy.
It hasn’t worked. The U.S., Europe, and Japan are all growing at their slowest rates in decades. In many ways, these policies have backfired…
• Bond yields have plunged since the financial crisis…
For instance, the 10-year U.S. Treasury paid an average annual interest rate of 7% from 1962 to 2007. Today, it pays just 1.6%.
According to Gundlach, treasuries are one of the worst places to put your money right now. He says he’s “never seen a worse risk-reward setup.”
It’s the same story around the world.
Yields on Japanese (-0.2%), German (-0.04%), French (0.2%), British (0.8%), and Italian (1.3%) 10-year government bonds all hit record lows this month.
That’s a big problem for millions of investors.
For decades, investors could earn a safe, decent return by owning these bonds. Not anymore. These days, you have to own risky assets to have any shot at earning decent returns.
• Investors have loaded up on junk bonds…
As you may know, junk bonds are issued by companies in poor financial shape. Junk bonds pay higher rates to compensate investors for their higher level of risk.
According to the Securities Industry and Financial Markets Association, in the four years leading up to the U.S. financial crisis (2004–2007), U.S. corporations issued $512 billion in junk bonds. In the last four years (2012–2015), junk bond issuance has exploded to $1.24 trillion.
And with so many investors “reaching for yield,” junk bonds don’t pay nearly as much as they used to. According to Bloomberg Business, U.S. junk bonds are yielding about 3% less than their 20-year average.
On top of that, credit rating agency Standard and Poor's reports that corporations are defaulting at the fastest pace since the 2008–2009 financial crisis. As the lowest quality bonds on the market, junk bonds have a high likelihood of default.
• Investors have piled into stocks too…
As you’ve probably heard, the S&P 500 just hit a new all-time high. It’s now up 225% since March 2009.
Stocks typically pay higher returns than bonds over long periods of time. But with that higher return comes higher risk.
When a company issues a bond, it promises to pay back the original investment plus interest. When a company issues stock, it doesn’t make that promise. Instead, investors get a share of a company’s profits… but only if the company makes profits. This makes stocks riskier than bonds, in general.
Dispatch readers know companies are struggling to make money today. As we’ve explained, corporate profits are on track to fall for the fifth straight quarter.
• Gundlach is shorting stocks…
Shorting a stock is betting that it will fall. Reuters reported last week:
Jeffrey Gundlach, chief executive officer of DoubleLine Capital, said on Tuesday that there is “big money” to be made on the “short side” if equities fail to stay near current highs.
• And he says you’re better off owning gold…
According to Reuters, Gundlach owns gold because “things are shaky and feeling dangerous.”
This won’t surprise regular readers. As we often say, gold is the ultimate safe haven asset. Gold has preserved wealth for centuries because it’s real money. It’s durable, easy to transport, and easily divisible.
Unlike paper money, governments can’t destroy gold’s value on a whim. Destructive policies like negative interest rates often cause the value of gold to skyrocket.
• E.B. Tucker, editor of The Casey Report, is also telling his subscribers to own gold and silver…
E.B. sees “very tough times ahead for stocks and the economy.” That’s one reason why he’s bullish on precious metals.
Gold is already up 21% this year. Silver is up 41%. Those are big moves for such a short period. And E.B. thinks gold and silver are both headed much higher. He even added two gold stocks and two silver stocks to his portfolio this year.
Gold and silver stocks are leveraged to precious metals prices. That means a small move in the price of gold can cause gold stocks to surge.
One of E.B.’s gold stocks is up 64% since March. The other has soared 74% since April. And one of his silver stocks has skyrocketed 98% since April.
You can find out about these stocks and more by signing up for a risk-free trial of The Casey Report. And today, we’re offering it for 50% off the regular price. To learn more about this special offer, watch this short video.
In it, E.B. explains the #1 threat to your wealth right now. As you’ll see, it’s not an economic recession, stock market crash, or even a global banking crisis. It’s something much more dangerous.
Chart of the Day
Silver could go even higher than gold in the coming years.
That’s because silver is “cheaper” than gold right now. Today’s chart shows the gold-silver ratio going back to 2000. This ratio shows how many ounces of silver you could buy with an ounce of gold. The higher the ratio, the more “expensive” gold is relative to silver.
As you can see, this ratio has been climbing since 2011. Earlier this year, it topped 80 for the first time in more than five years. This is important because the last two times the gold-silver ratio topped 80, silver staged a huge rally. The ratio topped 80 in 2003, and silver went on to rally 159%. The ratio topped 80 again in 2008, and silver went on to rally 209%.
Since spiking above 80 earlier this year, silver has taken off. It’s up 41%, nearly double gold’s 21% gain.
Even after its huge jump, silver is still “cheap” relative to gold. Right now, the gold-silver ratio is 12% higher than its average since 2000.
In other words, silver still has a lot of catching up to do. That’s one reason why E.B. just recommended his second silver stock this year.
You can learn about E.B.’s two silver stocks by signing up for The Casey Report. This opportunity may not last long, so we urge you to act quickly. That’s why we’re offering The Casey Report for 50% off the regular price. Again, you can learn how by watching this short video.
Delray Beach, Florida
July 20, 2016
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