Interesting Interest Rates

After some relaxing time visiting family and friends over the holidays, it’s time to get back to sorting through this mess of economics and investments.  I’ve mentioned previously about sharing what I believe will be one of the best investments of the next several years, but before I dive in I want to quickly review my general position on investing.
Great investments for me are areas such as markets that are so severely shunned by others that they are selling at crazy levels or stocks for example that are sold relentlessly, but really still have a sound financial structure and a relevant business model.  These are the types of situations, which get me excited about opening up my wallet and purchasing an investment.

So with this fresh in our minds, let’s move on to discuss interest rates.  There are very few guarantees in life, but one guarantee is that people will not lend money (at least for very long) to others for less than 0%.  Why would anyone give someone else money to use and not get paid something in return for giving them the money.  So from my point of view, this puts a worst case scenario for interest rates at 0% (the downside risk).  I happen to think the actual worst case is something higher than 0%, but let’s stick with the zero.

The following is a historical chart of interest rates the US government has paid to borrow money for ten years going back to the late 1800’s.

In the past 100+ years, the interest rate for a 10 year bond has been at its lowest around 2%.  The current rate for a 10-year bond is 1.87%.  So, if we place odds on whether rates will be lower or higher over the next several years, my money is easily on higher.

Just to be clear, I couldn’t tell you exactly when interest rates will be higher because markets tend to stay at extreme levels for longer than anyone typically estimates (anyone who says they know is guessing and don’t let them convince you otherwise). But I am willing to bet (put my money into an investment) they will be higher in 5-10 years from now as opposed to lower. 

The big question now is how to take advantage of this as part of an overall portfolio.  TBF and TBT (leveraged – uses debt to juice the returns) are exchange traded funds (ETF), which purchase securities designed to allow an investor to position themselves for higher interest rates.  Since I still believe the economic environment is weak for at least a good part of 2012, I do not believe we see a whole lot of upside pressure on interest rates in the near term.  However, I will be looking to begin making purchases of these ETF’s throughout 2012.  From my point of view the odds are stacked in our favor here, low risk with high potential opportunity.

Should you find this interesting and intriguing, contact your financial advisor and ask them their recommendation for how to best take advantage of a long term, higher interest rate environment.  Let them earn their money in 2012.

I plan on keeping a close eye on the market over the next few months with everything that’s been going on.  Some pretty bearish positions have been executed in some different areas (actual investments made as opposed to someone simply talking about different investments on the news, but not really putting their own money behind it), so I’m not the only one who thinks 2012 could be a rather bumpy ride and willing to put their money behind it by buying some protection.

Happy New Year!

Joel Fink
Joel.fink@yahoo.com