Time to make some money … borrowing “short” and lending “long”

Posted: September 15, 2014 in Burse, Diverse, Politica si politici
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What happens when interest rates are “artificially” lowered below zero ? Denmark moved interest rates below zero in 2012. They are still below zero today. The European Central Bank has introduced a raft of measures aimed at stimulating the eurozone economy, including negative interest rates and cheap long-term loans to banks. It cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money. What will happen then? You already know… Savers will get clobbered. People will borrow money. And asset prices will go up. So what should you do? Own assets. Own stocks and real estate, both in Europe and in the U.S.  I could be wrong of course. But I believe that this is still a time to be playing offense, not defense. There will be a day to play good defense. But we’re not there yet… In my opinion, now is a time to make money.

Would you ever borrow money… to invest? When would be the right time – if any – to do that? Bill Gross – the billionaire known as “The Bond King” – thinks it’s time to borrow money to invest.

“It’s probably a good time to lever in a mild sort of way,” Bill Gross said in a television interview last week. What is Bill thinking? After all, stocks have soared since 2009. What is he talking about?

SOURCE: http://www.dailywealth.com/2713/take-advantage-of-ultra-low-interest-rates

Here’s what he means: Chances are good that you won’t make much money in interest in the next couple years. 10-year bonds are only paying you 2.5% interest – hardly enough to live on. And do you want to lend money to the government for 10 years? Plus, short-term interest rates are basically zero.

So here’s what Bill is proposing… Borrow money at short-term interest rates (which are near zero), and use that money to buy something that pays a higher rate. Borrowing “short” and lending “long” (as this is called) is often a dangerous strategy… It has bankrupted many brilliant people.

But the brutal reality is, Bill Gross needs to “juice” his returns. 2.5% interest is not good enough. And short-term interest rates ARE low enough where he can make this work.

I don’t advocate this strategy for most people. Bill became a billionaire by making smart interest rates bets – and that is darn tough to do. But I do agree with Bill that you do want to take advantage of today’s low interest rates if at all possible.

My number-one recommendation for you for taking advantage of today’s low borrowing costs is U.S. housing – single-family homes… I expect house prices can continue to soar even after the Federal Reserve starts raising interest rates. (I explained why in this DailyWealth essay a couple weeks ago. I urge you to go back and read that.)

Don’t be stupid about it. Don’t go crazy. Follow Bill Gross’ advice, and do it, but “in a mild sort of way,” as he said. The goal is to amplify your returns a bit if I’m right. The goal is NOT to bankrupt you if I’m wrong. Interest rates are at record lows. And house prices fell by a record amount in the bust, and still have plenty of upside. Take advantage of both of those facts. Simple.

 

Would you pay a bank to hold your money for you? That’s what happens when interest rates are negative. The idea of negative interest rates sounds insane… Who would put their money in the bank to earn a NEGATIVE interest rate?

When you think about it, the immediate results of negative interest rates are pretty obvious… :”Savers” get clobbered. Retirees lose money on their savings. It’s terrible; People borrow money. Hey, it’s “free.” Why not get some? Asset prices go up. What do people do with the free money? They buy stuff.

This is what happens when interest rates are “artificially” lowered below zero. (When I say “artificially,” I mean when the central bank sets rates below zero.)

The trouble comes – of course – when the policy is reversed. Then all those assets that were bought with borrowed money fall in price, and everyone that borrowed too much goes bankrupt.

You might think that no country in its right mind would move interest rates below zero…

You would be wrong… Denmark moved interest rates below zero in 2012. They are still below zero today. The European Central Bank has introduced a raft of measures aimed at stimulating the eurozone economy, including negative interest rates and cheap long-term loans to banks. It cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.

What will happen then? You already know… Savers will get clobbered. People will borrow money. And asset prices will go up. So what should you do? Own assets. Own stocks and real estate, both in Europe and in the U.S.

Know that you will sell those assets someday. You know that the rise in asset prices will be built on ultra-low (and potentially negative) interest rates around the globe. And you know that those ultra-low interest rates will have to end someday. You don’t want to go down with the ship.

We may have a long time before we have to sell… The Economist magazine wrote that “markets don’t anticipate the European Central Bank [raising interest rates] back to 2% until at least 2020.” So don’t worry just yet. I could be wrong of course. But I believe that this is still a time to be playing offense, not defense. There will be a day to play good defense. But we’re not there yet… In my opinion, now is a time to make money.

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