Wed, Sep 20, 2017|Justin Brill

It's Time to Change Your Thinking About Government Bonds

A new record for the long bull market... This is officially the second-largest rally in history... It's time to change your thinking about government bonds... Don't miss your chance to join a legendary investor, absolutely risk-free...

This month, the bull market in U.S. stocks passed another major milestone...

Regular readers know this rally is already the second-longest in history. Last week, it officially became the second-largest as well.

According to data from LBL Financial, the benchmark S&P 500 Index has now climbed more than 270% from its March 2009 low. This officially surpasses the 267% rise from June 1949 through August 1956.

The current bull market now trails only the rally from December 1987 through March 2000 – when the last "Melt Up" ended – in either metric. But it still has a long way to go to claim the top spot. As we noted in the August 9 Digest...

Despite its impressive run, the current bull market is dwarfed in both length and total return... From its post-crash low in December 1987 through the dot-com peak in March 2000, the S&P 500 Index rose nearly 600%. That's more than two times the return of this bull market so far.

You can also see that the two bull markets have followed a remarkably similar trajectory so far. This suggests significant gains could remain ahead.

For example, when compared with the 1987-2000 bull market, today's date would fall in late April 1996. As the folks at Bespoke Investment Group pointed out in a recent note, warnings about "excesses" in the stock market were starting to appear at this time. But it was still seven more months before then-Fed Chairman Alan Greenspan's "irrational exuberance" speech in December 1996... and four years before the bull market finally peaked.

Again, we aren't saying the current bull market will continue to follow this path. There are no certainties in the market. But this chart shows Steve Sjuggerud's Melt Up prediction isn't just possible... It has happened before.

The next time you hear someone warn that the bull market is getting "long in the tooth," remember this chart and Steve's advice: Bull markets don't die of old age.

'You need to change your thinking about government bonds...'

But while Steve continues to recommend stocks, he's anything but bullish on government bonds today.

As is often the case with Steve, this is not a popular stance... Investors are buying more government bonds right now than any time in the past year. In this morning's edition of our free DailyWealth e-letter, Steve explained why you should think twice before joining them...

"Bonds drew in money for the 26th straight week," Reuters reported last week, "as investors hungry to earn a return rushed into U.S. Treasury funds, which enjoyed their biggest inflows in 62 weeks."

Before you follow the crowd and rush into government bonds, consider this... Government bonds around the world pay next to nothing.

If you lend your money to the Japanese government for the next 10 years, you will earn literally nothing. In Switzerland, the story is even worse... Who wants to earn zero percent for 10 years?

Many investors still believe government bonds in the U.S. and other developed countries offer "risk free" returns...

But Steve thinks it's time to reconsider the conventional wisdom...

In college, I was taught that government bonds in developed countries – particularly the U.S. – are safe, and should be thought of as having a "risk free" rate of interest.

We were taught that all other interest rates should be based on this rate... and that in exchange for increased risk, other rates should be somewhat higher than the risk-free government bond rate. (Your 30-year mortgage rate is a good example. Its rate is usually a percentage point or two higher than the 30-year government bond rate.)

"Hmmm," I thought, sitting in the classroom... "Is this really true? Is a government bond really risk-free?" The lesson didn't sit well with me, but I accepted it as the way things are in finance.

Today, you have to wonder how risk-free a government bond really is.

To Steve, it all comes down to some simple math...

The U.S. government is in debt for roughly $20 trillion. And America has about 125 million households. If you divide one number by the other, you can see that the government owes $160,000 per household. (Of course, it's not the government that's going to pay that... It's you and me.)

It's hard to call something "risk free" that has racked up $160,000 in debt for every household in America.

Japan's government, which pays essentially no interest on its bonds, owes even more than the U.S. – around $185,000 per household.

So, will buying a Japanese or U.S. government bond truly deliver a risk-free return?

Of course, as Steve noted, he can't take credit for this idea...

Legendary investor Jim Grant – publisher of the world-renowned Grant's Interest Rate Observer – has been following this growing threat longer than anyone. More from DailyWealth...

"The risk-free return in government bonds could turn out to be a return-free risk," legendary investor Jim Grant has said many times over the years. When I read those words for the first time many years ago, I thought, "Wow, that thought couldn't have been expressed any better."

Jim is probably the biggest legend and the most respected guy in the investment newsletter business. (He's humble, too... He won't take credit for the phrase "return-free risk," but he doesn't know where he heard it first.)

I was fortunate to have a private dinner with Jim, Bill Bonner, Porter Stansberry, and a couple other folks not long ago. I was intimidated by the brainpower in the room, and the knowledge of history. And I loved every minute of it.

Jim has got it right. You need to change your thinking about government bonds... For decades, government bonds have had a reputation for risk-free return. But today, the story is different... Governments owe trillions of dollars. And they pay next to nothing in interest. So stop thinking of government bonds as delivering a risk-free return...

You should think of government bonds today as "return-free risk." Then, you should reassess exactly how much of that return-free risk you want to own in your portfolio.

As Porter noted on Friday, he's been working for more than 10 years to get Stansberry Research subscribers access to Jim's work... Time and again, Jim refused. He was concerned about harming the special reputation he's built on Wall Street... and he worried "retail" investors wouldn't understand or appreciate his work.

But this month, after a marathon of meetings in Baltimore and New York, Porter was finally able to convince him. Today, all interested Stansberry Research subscribers can try Grant's Interest Rate Observer – and get VIP-level online access to Jim's exclusive investment conference next month – absolutely risk-free. But if you're interested, don't delay... This special offer won't last long, and we'll likely never be able to make it available again. Click here to claim your risk-free subscription now.

Editor's note: Today, we're featuring the latest installment of our "Chart of the Moment," a weekly feature from our colleagues C. Scott Garliss, Greg Diamond, and John Gillin of the Stansberry NewsWire team. In the Chart of the Moment, they share the most important idea, trend, or opportunity they're following each week. We hope you enjoy it... And please let us know what you think at feedback@stansberryresearch.com.

Chart of the Moment

In today's chart, you can see that the ratio of stocks to bonds is at a level not seen since the tech crash in 2000.

This metric compares the prices of stocks on the S&P 500 with the prices of U.S. bond futures. When the index is high, it means stocks are significantly outperforming bonds

Today, the S&P 500/bond ratio is at 16.1 – the EXACT same level as the prior peak.

Interest rates were higher in 2000. Higher rates should make bonds more attractive as investments, so the gap at the time was even more unusual. But the similarities are worth noting. As you can see in the chart, rates decreased with the longer-term trend and bounced into the 2000 high, right before the crisis.

We're seeing a similar move play out now. But is there a new crisis or are we just looking at a correction? After all, crashes like the year 2000 don't happen that often, so the similarities could be warning of a correction rather than a full-blown crash.

Will the Federal Reserve's mission to normalize rates and reduce its balance sheet result in a new era of higher rates? (Notice the long-term trend of interest rates at the bottom of the chart: lower lows and lower highs.) And would that create a selloff like we saw in 2000?

Tax reform could be the binary event the market is anticipating. Passage of a new tax regime could encourage more spending and lift the market, while the failure of a reform package would hold down economic growth. The similarities between the two periods appear to confirm this, in my opinion. The "crisis" may not be a financial crisis (bubble in tech), but rather a crisis in the failure of monetary policy (Federal Reserve) combined with a failure in fiscal policy (tax reform).

The similarities are flashing a warning that we may be headed for a market downturn... or a correction at a minimum.

– Greg Diamond, Stansberry NewsWire

Editor's note: Stansberry NewsWire is your source for real-time, actionable financial news and analysis. You'll receive up-to-the-minute news and market research, expert commentary, and trading ideas typically reserved only for Wall Street professionals and the wealthiest individual investors... absolutely FREE. Click here to sign up now.

New 52-week highs (as of 9/19/17): AMETEK (AME), American Express (AXP), Allianz (AZSEY), Alibaba (BABA), iShares MSCI BRIC Fund (BKF), Berkshire Hathaway (BRK-B), Celgene (CELG), WisdomTree Japan Hedged Equity Fund (DXJ), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Japan Fund (EWJ), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), iShares China Large-Cap Fund (FXI), ETFMG Prime Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), iShares MSCI China Index Fund (MCHI), Monsanto (MON), Microsoft (MSFT), AllianzGI Equity & Convertible Income Fund (NIE), NVR (NVR), Procter & Gamble (PG), Koninklijke Philips (PHG), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), iShares MSCI India Small-Cap Fund (SMIN), ProShares Ultra S&P 500 Fund (SSO), Stanley Black & Decker (SWK), Guggenheim China Real Estate Fund (TAO), Verisign (VRSN), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).

Another quiet day in the mailbag... One subscriber notes a new front in the ongoing "war on cash," while another has a question about our colleague Kim Iskyan's new International Capitalist advisory. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.

"Hello, Stansberry, I opened up my monthly Discover Card bill yesterday and they had an account update sheet in the envelope. It said they would no longer be accepting cash for payments. Probably doesn't happen a lot anyway (paying with cash), but to read it in print is a bit shocking.

"That's all. Keep up the good work. Oh, I'm up nicely in all 4 of my TrueWealth China Opportunities positions. They are gleaming above the rest of my picks. Thanks." - Paid-up subscriber Chad B.

"Hi, is there a minimum to invest internationally [with Kim's International Capitalist advisory]?" – Paid-up subscriber Linda Page

Kim Iskyan comment: Linda, in International Capitalist, we'll be investing in a range of international markets... but we'll be doing it through stocks that are listed on major global exchanges – like the U.S., London, and Hong Kong markets – where there are no minimum investment levels. (You'll almost always be able to invest in these stocks through your online broker... and in any case, I'll tell you which brokers I recommend.)

Investing internationally is a great way to diversify your portfolio and give you access to opportunities that aren't available to you if you're only looking at U.S. stocks.

Our strategy is to find "asymmetrical opportunities" wherever they exist in the world. I'll be searching for opportunities to invest where the potential gain is a lot greater than the potential loss. And we'll be providing in-depth, "boots on the ground" research you won't find in most other services like this.

Lifetime International Capitalist members will even have the opportunity to join me and my team on some of our most interesting investment-research trips. You'll have to pay your own way on these trips, of course... But whenever we put together an interesting adventure – like an investment tour looking at real estate opportunities in some of the smaller cities in China... a new company we're covering in Mongolia, India, or somewhere in Europe... or even just a dinner meeting in Hong Kong or Singapore with Peter Churchouse and some of his contacts on a specific investment subject – you will be invited to join us.

However, it's important to understand that we will be aiming to invest in stocks where we can make hundreds of percent gains... and by its nature, this sort of investing is relatively aggressive. It's for the small slice of your portfolio where you're willing to take some risk. I can't give individual advice, but for most people I'd suggest no more than about 5% of your portfolio be invested in the kinds of stocks that I'll be telling you about in International Capitalist.

You can learn more about becoming a member right here.

Regards,

Justin Brill
Baltimore, Maryland
September 20, 2017