How To Prepare For a Lower Rate Environment

How come no one wants to write a piece about how to prepare for lower interest rates? Why is it that all of the headlines and conversations on the TV revolve around when rates are going up and how to set up your portfolio for that sort of environment? Why is it that everyone just assumes that interest rates are going higher? Why are so few people out there informing investors about how to prepare for lower interest rates? Why does the financial media obsess day after day about when interest rates are going up? Why is everyone so comfortable with the status quo and assuming that interest rates are going higher soon? Why do economists even have a say in this matter as there is no group on planet earth that has gotten this more wrong for so long?

It makes me angry and I feel sorry for the retail investing community that has to subject themselves daily to such nonsense. The career risk from the sell side where they can't stand up for themselves and say, "Enough is enough, rates aren't going anywhere", is an embarrassment to our community. Wall Street Economists somehow still have jobs. No group has been more wrong. The financial media is just as bad. Someone please send me an article written in the past 2 years about how investors should prepare for lower rates so I can email the author and congratulate him or her on not being a sheep.

The assumption that U.S. interest rates are simply just going to start going up is very dangerous. I see the sentiment data. I see the anecdotal evidence that shows us that everyone just assumes rates are going up. It's ridiculous that it is "common knowledge" that interest rates, "can't go any lower". That phrase scares the hell out of me. Why can't they go lower? Who says they can't? Other than everyone who has been dead wrong for years (see economists, academics, etc). I think this herd mentality can be very harmful to your portfolio and subjecting yourself to such ignorance cant be detrimental to your returns.

If you manage a portfolio, you don't have career risk to worry about. Stand up for yourself and say, "That's it you idiots, interest rates are not going up". I am very concerned that so many people are on the wrong side of this trade. We're talking about a 35 year bear market in interest rates here folks. We're talking about one of the most historic trends in American history. Why does it just have to reverse overnight? Historically, going back over a 200 year bond market, interest rates tend to bottom out through a process that takes somewhere between 10-20 years depending on which bottom in rates we are referencing. Look back at history; it's there for us to learn. Interest rates hit new lows just a few years ago (on the 10year), so we should just now assume that we are about to see the first v-bottom in rates in American history? Why because the short bald guy on the TV says so? Or the 10,000 articles that all repeat the same thing?

I don't know if I will be right or if I will be wrong. Fortunately I don't care about being right or wrong, I'm only in the market to make money. I don't have career risk in being wrong. I tell me investors exactly how I feel and I speak from the heart. They know that sometimes I'm wrong and sometimes I'm right. For us it's all about managing risk and responsibly allocating assets in the direction that we think these assets will be headed. Most of the time I don't even have a strong opinion so we stay away. That's fine too. Other times there may be counter-trend moves within larger trends that we can take advantage of. Shorting Treasury bonds the past few months worked out very well (see here). But this comes within a larger trend of lower rates and higher bond prices that we've been pounding the table on for years (see here).

Let me be very clear. I have no idea where interest rates are going. For that matter, I don't know where any asset class, stock, sector or commodity is going. No one knows. But I will say this, the Fed Fund Futures market is essentially pricing in zero rate hikes in 2015. The market has been dead right for a long time. Meanwhile, the financial media is obsessed with bottom fishing interest rates. Why aren't any of them helping you prepare for lower interest rates? Do you want to continue to trust their assumptions? You know what happens when you ASSume....

Wall Street Economists have been an embarrassment to the financial industry. Coming into 2014, Wall Street Economists were polled about interest rates. 67 out of 67 firms told you that rates were going up so sell bonds. What happened? 2014 turned out to be one of the worst years for interest rates in the history of the United States of America. Treasury Bonds had one of the greatest years in American History. You would think that Economists would have learned their lesson, apologized, and changed their tune. Nope, this group keeps telling you to sell bonds and interest rates are going up. The financial media, meanwhile, instead of calling them out and apologizing to their audience for getting it so wrong as well, continues to prance these economists around who keep telling you the same thing. it makes my stomach cringe just thinking about it.

Accept these assumptions all you want. I refuse.

We focus on price. We focus on sentiment. We focus on reality, not theory. The market suggests rates will stay low. The market HAS been suggesting rates will stay low. The market has been right. The market will always be right. The market is the only reality that we know of. Price is the only truth that we can count on. As market participants, we have no choice but to focus on reality.

Stick with your herd mentality if you want. You can be sheep if that's what helps you sleep at night. Personally, I couldn't sleep at night if everyone agreed with me. I'd be scared frankly.

Interest rates can't go lower? Says who? If they asked us 15 years ago where Japanese interest rates were headed we would have all said higher, myself included. Guess what? They're still not.

The herd scares the hell out of me here. I want no part of it.

Full Disclosure: Long 30-year Treasury Bond Futures

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