"Quick, which has been the hottest investment since 1982, stocks or Treasury bonds?"
Bond guru Gary Shilling asked that question back in 1999 – while the dot-com boom was in full swing.
Stocks returned 20% a year over that stretch (with dividends reinvested). From 1982 until the dot-com boom in 1999 was probably the best 17-year period for stocks in all of history.
Nothing could have beaten stocks during that time – right?
It turns out, a simple Treasury bonds strategy did. No kidding.
In fact, it crushed stocks – delivering a 24% annualized return...
The simple, stock-beating strategy was to buy a 25-year Treasury bond and hold for one year. Then, you'd sell it, roll the proceeds into a new 25-year Treasury bond, and hold for one year again.
(The key to the big gains is to do this with zero-coupon Treasury bonds instead of regular Treasury bonds. Zero-coupon bonds don't pay interest... Instead, they sell at a discount to their maturity value. Buying long-term zero-coupon bonds gives you a big discount, and potentially big upside potential.)
"But Steve, why are you telling me this?" you might be thinking. "You can't make 24% in a year in Treasury bonds anymore."
Shilling – the man who predicted lower interest rates in 1981 and has made a fortune using this strategy for decades – says it can keep going...
In a Bloomberg article yesterday, he explained that if interest rates on government bonds drop "from the current area of about 3% to my long-held 2% target in 12 months," then the total return will be 25% for a 30-year Treasury bond... And a zero-coupon 30-year Treasury would return 33%.
Yes, that's a 25%-33% return in Treasury bonds in just one year. Shilling concludes: "Where can you find comparable investment prospects?"
Now, nearly all investors disagree with Shilling...
Last week, I told you that Bill Gross – known as the "Bond King" for his decades of great calls on interest rates – says we should expect interest rates in long-term Treasury bonds to stay around 3% for the rest of this year. And most investors expect higher rates than that.
But I agree with Shilling – at least in the short term.
In my True Wealth newsletter, we recently made a big bet that interest rates on long-term bonds will go DOWN this year – not up.
So far, subscribers who have followed our advice are making good money on this trade.
"But what about all the government spending, Steve?" It's a fair question. The U.S. government is $20 trillion in debt. If it can't pay it back, investors would lose confidence in government bonds, sending interest rates dramatically higher. The only question is, when will this happen?
According to Shilling, we're not in any danger of this happening yet:
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A key point here... In my True Wealth letter, we're not making a long-term bet. Instead, we're putting on a trade over a few months.
Investors are almost unanimously betting against Treasury bonds. They are nearly unanimously betting on higher interest rates. Only Shilling and I disagree with the crowd.
So far, so good.
I believe we have big gains to come in our bet on lower interest rates over the next few months.
If you are betting on higher interest rates today, you need to realize that you are part of a crowded trade. And when a trade gets this crowded, the consensus is usually wrong.
Looking years ahead, I get it – it's a scary picture. The U.S. government is heading ultimately toward a debt crisis, with dramatically higher interest rates.
But that scenario is likely years away. For the next few months, my money is on lower long-term interest rates.
Good investing,
Steve
Further Reading:
"The Fed is lying to you," Steve writes. The Federal Reserve has said it will raise short-term rates to 3.4% by 2020... But Steve and the "Bond King" disagree. Learn more here.
"The rate hikes in 2000 and 2007 led to major stock market crashes," Steve says. To learn how close we are to history repeating itself, read more here.
Interest rates are likely to fall in the short term, making higher bond prices likely. And this property and casualty insurer is a great way to take advantage of it...
Market Notes
FURNITURE AND DÉCOR BOOMS WITH HOUSING
Today's chart highlights a company that rises with the housing market...
Steve has been bullish on real estate since 2011, after the housing bust crushed prices. Now, the market has made a huge comeback. Home inventories are tight... And demand is rising as a result. Homebuilder stocks soared last year, including KB Home (KBH), PulteGroup (PHM), and NVR (NVR).
Right now, we're seeing another bullish sign for housing – rising shares of home décor retailer At Home (HOME). The company has about 150 superstores throughout the U.S., where it sells furniture, home textiles, housewares, and more. And with more than 50,000 unique products, it's achieving its goal to "out assort" the competition. At Home is one of the fastest-growing retailers in the country... Last year, its sales jumped 24% from a year earlier to $951 million. Meanwhile, sales at its competitors' stores were only up 3.6%.
As you can see below, the stock is thriving... Shares have increased around 120% over the past year and recently hit a new high. If the housing market keeps making strides, redecorating sales will likely continue...
