By Professor Ricardo “Rick” Ulivi, Ph.D.
August 2016
We all know that interest rates are at record lows, not only in the USA but also in the most productive economies of the world. In fact, in some countries, interest rates are negative. That is, you have to pay them to take your money. Totally crazy.
Are these low interest rates telling us something?
Are they conveying a message that we need to pay attention to? After all, investing successfully is all about correctly predicting the future. So, the question is: what message are interest rates sending us? Let me explain this question by reviewing an earlier part of my life, when I was single.
When I was a young teenager, and was interested in knowing whether a young lady might be interested in me, I would ask my friends. The word would get around that this or that girl had a fancy for me. I am sure you remember those innocent times when holding a girl’s (or boy’s) hand was a delicious moment.
Life moved on and I became a young adult, in my early twenties. Friends were no longer helpful in letting me know of a lady’s interest in me. I had to develop my own system, and I did, as I’m sure you did also. What was mine? Eye contact! Let’s suppose I would go to a bar or a disco, and I would scan the floor trying to determine if any young lady might be interested in having me approach her. Because I fear rejection, I would not just approach anyone. I wanted some type of assurance that I would be welcome. That is, I wanted some type of a signal; after all, the possibility of being turned down was too frightening, so I had to receive some clue as to whether my approach might be welcome.
What signal or clue did I look for?
Eye contact! If I looked at her, and she would return my gaze, it seemed to me like a gesture that it was OK to make my move. The system worked very well for me, but it was not fool proof. More than once I established constant eye contact with a young lady, which encouraged me to approach her. Feeling sure that it was safe, I would introduce myself with a big smile, only to be asked with coldness and anger, “Why are you STARING at me?” Oops, obviously my system was not fail proof. Eye contact worked well, but it often proved to be an unreliable predictor. The rejection hurt, because 45 years later I can still feel it!
Let’s go back to my original question: “What are these low interest rates telling us?” Is it possible that these record low interest rates are predicting something, just like a woman’s eye contact was suggesting a warm reception to my advance? I believe so, but just as eye contact was not an infallible indicator, neither are interest rates. What are interest rates telling us?
Record low interest rates are telling us that the financial markets expect low inflation and continued soft to no economic growth. Assuming this is the correct interpretation, why are stock market and real estate prices at record highs? Because buyers are misunderstanding the message. Just as when I thought good eye contact meant an approach would be welcomed, only to be rejected for staring, buyers are blind to the real message that interest rates are sending. They are telling us that slow to no economic growth will continue, and those of you that are misunderstanding this message might pay dearly for this misreading.
How would a 50% drop in stock prices affect your retirement?
If you own stocks, be ready for a severe drop in prices, say 50%. How would a drop of that magnitude affect your retirement savings? Furthermore, suppose that 28 years from now, you still have not recovered the value of your investments from 2016. How would this affect your retirement?
You don’t think stock prices can drop by 50%, or more? Why don’t you read what happened to the Japanese stock market starting in 1988? Since then, prices are down more than that. In fact, today, twenty-eight years later, prices are still down 55% from their high in 1988. If it happened in Japan, it can happen here. That’s the message that interest rates are giving us; don’t ignore it.
Interpreting eye contact helped make my best investment ever!
I established eye contact with a young lady in 1973, and that encouraged me to approach her. That led to a lasting and wonderful marriage of 43 years, and still counting. Just like I was lucky enough to interpret the meaning of her eye contact with me, I urge you to correctly interpret what interest rates are signaling. Sell your stocks, and now!
Too often preservation of capital is something we pay lip service to. But for me, and for you, it should be of the utmost importance. Follow my advice. Sell now to protect yourself, and buy back later, when it’s cheaper.
If I am wrong, you have the right to look at me in my eyes and tell me: you were wrong! But if I am right, I should have the right to tell you: “I told you so!”
To set an appointment to discuss this further, just reply to this email or call me at 1-714-771-6000. But don’t wait; it’s your capital I am trying to protect.
