You hardly hear it mentioned in the media or by the talking heads at
CNBC but a history was just made in the past week that can have profound impact
on all of us, regardless if you realize it or not!
The bull market lasting for 40 years
long for bonds is officially over by now!
How do I know, you may ask? Of course there will be no official
announcement on it and we have to rely on some technical measure to tell us.
The most relevant indicator is the monthly 10-year Treasury yield that
is based on the data points at the end of each month and can reliably tell us
if a long term trend for the 10 year interest rates has changed. As you can see
below, for over 40 years starting from late 1970s, the 10 year interest rates
have always shown consistently lower highs and lower lows, a gigantic downtrend
for the long term interest rate, or inversely, the gigantic uptrend for the
long term bonds. If you ask any bond traders or analysts starting after the
70s, no one would know what a bear market for bonds would look like as for
them, it has been a straight line up for bonds (or down for interests). But finally, for the first time in 40 years,
we are seeing a higher high in the monthly 10-year Treasure yield chart logged
in on Jan 31, 2018. This is a clear technical indicator that we are moving into
a higher interest era. If a bond trader
or analyst only knows how to trade for higher bonds, he or she will soon lose
their job! If you are still thinking you will continue to enjoy low interests
for your new mortgage moving forward, it is nothing less than illusion!
So what’s the big deal with this new emerging trend, you may ask next?
Well, you probably won’t feel much immediately and that’s why no one is even
interested to talk about it. Be aware, when the bond establishes its trend, it
is usually a very long term trend that may continue for decades. We have just
witnessed the end of the super bond bull market for 4 decades and very likely
we are seeing the start of a super bond bear market in the years to come. For a
once-in-a-generation change in trend that will last for decades, it will be
very slow but consistent and as such, minimal immediate impact will be felt for
most people. But gradually, its impact
will be profound and eventually will be very painful or exciting depending on
which side you are sitting. Just imagine what were the interest rates back in
1980s. A 30-year fixed mortgage rate topped out at 18.45% in early 80s! Believe
me, while it is unthinkable at the moment, we are moving towards very high
interest rates in the coming years. If
you need to borrow, obviously it will be very painful when such a day comes.
Conversely, if you can earn interests, then you will be a happy guy! Since this
is a blog for investment, I have to say we need to be prepared for poor returns
from stocks as a long term trend. When interest rates go up, the costs for
companies to borrow money will shoot higher logically. After a decade of great
bull stock market, people are very used to great profits from their stocks.
While I do believe we probably will still have a year or two to go for the
final melt-up phase to run through for the stock market, we’ll start to feel
the negative impact from higher interests more and more moving forward. It is a
general consensus that when long term interest rates go above 3%, which I
believe is likely to occur this year, the stock market may start to get
nervous. After that and if I’m right with interest rates consistently going up,
we will likely go into a very prolonged bear stock market as well. That’s why I have said many times, it is a
great time to set up your life insurance especially those based on floating
dividends in addition to fixed interest return.
Whole life (WL) is the best well-established dividend based life
insurance that I know of, which can greatly benefit from increasing interests
that can lead to increasing dividends for the policy holder. I know whenever
I’m talking about WL, I’m often challenged by friends questioning about the
cost-reward for WL. But virtually everyone I have talked about, their concern
is always based on their understanding about the high cost (something like
80-90% or even higher of the commission going into the agent’s pocket for the
first or second year premium). I understand this but believe me there is a way
to substantially reduce the cost if the WL policy is set up right, at least 50%
or even more reduction of the cost and then you can enjoy secured return for
life with a potential of increasing dividends (up to 10% dividends for my
policy per its historic records during 1980s-90s). All of the fast accumulating
cash value is tax-free and can be used during your life if you want for any
purposes. You just need to find a good agent who can really work for your
interest, not just his/her commission. That’s how I have set up my WL policy
and my kid’s and even looking for buying more (as a way of diversification of
my assets due to its security and tax-benefits) along with a clear high
interest trend emerging. I know the hot
life insurance almost every agent is promoting is the Indexed Universal Life
(IUL), which indeed has great years in the past decade due to the gigantic
stock bull market. I don’t want to argue with anyone promoting it as it could
be a good one for some people. Personally though I think IUL’s good time is
quickly coming to its end. If I’m right about the general bond and stock market
long term trend, we are going to enter into a very tough prolonged bear market
for stocks that may come in 1-2 years and if so, IUL policy holders will start
to feel the pain as their stock market-based return could become very miserable
but their premium could shoot up very high due to aging. Don’t need to argue
with me but just take it a second opinion and do your own research about the
nature of IUL and how it may perform if the market is not doing well.
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