Everybody expects higher interest rates in 2015.
You can chat to a newspaper editor, a stockbroker or a taxi driver, and they’ll all tell you the same thing. Bet the farm on higher cash rates and higher mortgage rates next year.
But if you ask why they think that way, you might hear them start to stammer.
Listen for this phrase: ‘Well, everyone says rates are going up. They have to go up.’
Take that as a sign that you’re not chatting with a deep thinker.
Rates in Australia and around the world have been low for a while — and people everywhere have blindly accepted that what goes down must come up.
But blind acceptance of orthodox thought is not our bag. If you dig a little deeper, you’ll see the case for low rates is getting stronger. You don’t have to like it — but you might as well profit from it…
Jim Rickards is an original thinker. He has been practically a lone voice speaking out against higher interest rates for years now.
We met Jim in March at our sensational investment summit in Melbourne, World War D.
Jim’s a compelling speaker. You should go and see him if you get the chance.
World War D had everything — bullish and bearish views — and that’s where Jim shared his insightful but out-of-the-mainstream view that deflation — not inflation — is the financial storm that nobody is expecting.
Jim opened our eyes to that idea, and to the idea that central banks can and will keep rates low for much longer than anybody expects.
These were bold calls. But so far, Jim has been right. It turns out inflation is much harder to ignite than governments around the world have expected. We got the latest confirmation of that overnight.
The minutes of the US Federal Reserve’s most recent meeting show that ‘many participants observed the committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations’.
In other words, the Fed thinks prices in the US economy aren’t rising quickly enough. That may strike you as ridiculous when you think about how the cost of living in Australia has risen. But if US inflation keeps tracking lower, you can bet your bottom dollar that the Fed will keep interest rates low in a bid to boost asset prices.
And as much as you might think our economy has decoupled from that of the US and hitched itself to China, if US rates stay low, Aussie rates stay low. That’s good news for asset prices and bullish for stocks.
But Jim didn’t need the latest Fed minutes to tell him that. Last week, he offered up another well researched but out-there view. He can see the officials stockpiling ammunition to keep interest rates low well into 2015 and beyond…
The doves are flying
It all comes down to who makes the decisions to raise interest rates. The newspaper editors, stockbrokers and taxi drivers typically overlook this level of detail.
‘Almost everything changes on January 1,’ Jim explained. ‘The President has vacancies to fill among Fed Governors, and he will most certainly put doves in. Also, two "super-hawks" — Fisher and Plosser — will no longer have a vote.’
(‘Dove’ is a term for those less likely to raise interest rates. Hawks are more likely to raise rates.)
With President Obama in ‘legacy’ mode, you can bet he’ll do whatever it takes to get the economy humming in his final two years in office.
Jim says Janet Yellen — the head of the Federal Reserve — is dovish. She won’t be in any hurry to raise rates. So according to Jim, the list of voting Fed members is stacked with doves. This group, he says, won’t raise interest rates.
Very few people believed Jim last year when he said rates would stay low throughout 2014. But it’s been the right call. And we like his explanation as to why this trend will continue.
How you could benefit
You don’t have to agree with the policies that the Federal Reserve and the rest of the world’s central banks are pursuing. Heck, you don’t even have to agree with Jim’s opinions — but don’t dismiss them. Instead, soak them up. Understand both sides of the argument.
That’s the best way to put yourself ahead of the investing pack — a cut above the crowd of wish-wash financial advisors and pundits.
If Jim’s right about interest rates staying low next year, we could be in for another round of huge gains on risky assets. That means small-caps, tech stocks and resource companies all deserve your attention today…before the mainstream cottons on to their potential.
For Markets and Money
This article originally appeared in Money Morning.