Jason Zweig, blogging intelligently for the Wall Street Journal:
. . . Measured before inflation, rates have never been so low in so much of the world.
On July 5, the day after the United States’ 240th birthday, the yield on 10-year Treasury debt fell below 1.4% for the first time in the nation’s history.
However, this is far from the first time that interest rates have gone negative — once you account for inflation to measure what economists call “real” rates. Adjusted for changes in the cost of living, the yield on Treasury bills was negative in 18 out of the 27 years between 1933 and 1959. Over the same period, intermediate-term Treasuries had negative real yields in 15 years. In the 1940s and again in the 1970s, negative real rates were common worldwide.
Nor is this the first time stocks have hit record highs amid negative rates. In 1958, short-term Treasury bills yielded minus 0.2% after inflation. Stocks nevertheless rose 43.4% that year to reach what then were all-time highs.
None of this means there’s nothing to worry about. Returns on stocks and bonds are almost certain to shrink, and investors all around you are likely to take reckless risks as they become increasingly desperate for income. In a world turned upside down, sanity will be your most valuable asset as an investor.
Rates probably won’t rise until almost no one on earth is expecting them to. When that happens, it will hurt.
Since 1913, U.S. stocks have gained an annual average of 9.3% when interest rates fall, but only 2.3% in periods of rising rates, according to finance researchers Elroy Dimson of Cambridge Judge Business School and Paul Marsh and Mike Staunton of London Business School. Bonds have returned an average of 3.6% annually in periods of falling rates, but only 0.3% when rates rise, the researchers calculate. The results include the effects of inflation.
Nevertheless, even at today’s emaciated yields, bonds remain a powerful hedge against declines in the stock market, says Fran Kinniry, an investment strategist at Vanguard Group. Treasury bonds rose 1% on June 24, when the British vote to exit the European Union knocked U.S. stocks down almost 4%.
With such slim prospective returns on offer, you will have to lower your expectations and raise the amount you save. . . .
Today’s low rates and buoyant stock market are the reason that — blessed with a little money I can truly afford to lose — I look for out-sized returns in speculative situations that will not be much affected by low, and eventually rising, interest rates — many of them not yet public companies.
I actually do have a bridge to sell you. And rectal applicators!* And training for Certified Nursing Assistants! And purpose for your employees! And home energy-efficiency certification! And a transcription tool! And a clot-removal device. And an aquablast treatment for your prostate!
And, of course, a system that will allow pilots to back out from the gate without waiting for a tug, cutting five or ten minutes — or eventually in some cases twenty (by allowing boarding and deplaning from both front and rear doors) — off the time passengers are stuck waiting to take off. Which in turn will unlock billions of dollars of efficiency for airlines and airports (and please passengers).
In that regard, one of you asked me recently whether — its having been such a long time that we’ve waited on Borealis, majority owner of WheelTug — it is not time to sell and look for something else. I continue to believe BOREF is a spectacular lottery ticket. (Bought only with money you can truly afford to lose, and only with “limit” orders, lest your 1000-share order for this currently-$5 stock be executed at $10. Though even at $10, the entire thing would be valued at $50 million; less than one fifth the value placed on this lovely Cezanne.)
The commitments WheelTug has from 20 airlines to lease the systems — if they can win FAA approval and be successfully produced — suggest the demand is there. The recent decision by Honeywell/Safran to discontinue their effort confirms what WheelTug believed: that their approach — three times the weight and hugging the main landing gear wheels that house the super-hot brakes — simply wouldn’t fly.
WheelTug may never fly, either. But a lot of smart people are working hard in the belief that it will.
See you in Philadelphia!
*Yech! Though if you suffer from Crohn’s Disease, not so “yech” at all.