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Yes, I admit it. As a moneymaking professional investor, I am currently obsessed with the yield on the benchmark 10-year U.S. Treasury!
I watch it like a hawk. And if you’re a frequent reader of my Money and Markets columns, you know that I’ve written about it multiple times so far this year and that I have been right on target with my interest-rate predictions as well.
Read on and I’ll explain why I am infatuated with this one single financial market indicator and why you should be, too, if you are serious about protecting and growing your money!
As a 30-year Wall Street veteran, one of my guiding principles was passed on to me early in my career by the legendary investor John Bogle, founder of The Vanguard Group.
John introduced me to Occam’s razor, which is a problem-solving heuristic with philosophical underpinnings.
If you’re like me, when John first told me about it, I didn’t know what a razor, in the philosophical context, was … but since it was the great John Bogle who was sharing it with me, I figured that I had better find out.
And when I went looking, I was surprised that Occam’s razor is simply a commonsense “rule of thumb” used by philosophers to shave away unlikely explanations so they can solve problems faster.
OK, by now, I’m sure that you are probably saying to yourself, “Thanks for this interesting tidbit of information, Bill, but what does Occam’s razor have to do with me, my money and the yield on the 10-year U.S. Treasury?”
Well, Occam’s razor — which has been attributed to the 14th century theologian and Franciscan Friar William of Ockham (yes, his name is spelled differently than his discovery) — says that: The simpler the solution the more likely it is to be correct.
And when you are working on Wall Street — which has a long history of creating schemes cloaked in complexity primarily for the purpose of separating unwitting investors from their money — getting down to the simple essence of things can be difficult. But if you can do it consistently, it can give you a distinct advantage over everyone else.
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So in a nutshell, what John was telling me was that in the financial markets searching for the simplest solution provides a powerful edge.
Now, here’s the good news for you:
In the current environment, there is one market metric that will tell you which way the stock market is going to go. Best of all, it’s easy to understand, accurate and complete.
This one market statistic should be the cornerstone of your investment research. That’s because this top-of-the-food-chain market yield can tell you more at a glance than reading multiple financial publications, sifting through countless articles on the Internet or spending hours watching financial programming on television.
And that one market statistic is … the yield on the 10-year the U.S. Treasury!
And here’s what it’s telling you now?
It’s saying that the stock market and interest rates across the board are headed down. That’s because, despite two recent interest-rate hikes by the Janet Yellen-led Fed at the short-end of the yield curve, the 10-year Treasury yield hit a three-week low earlier this week causing stocks to suffer their worst drop in five months.
What’s more, the lower-longer trend for interest rates is firmly in place. Here’s my proof.
This chart shows that the extra yield on U.S. bonds compared with other developed countries’ bonds is at, or approaching, record highs, especially when comparing the 10-year U.S. Treasury to similar instruments issued by the governments of Germany and the U.K.
As an example, the current yield on the 10-year German Bund is .4%. Yes, .4%. That’s a whopping 2% lower than in the U.S where the 10-year currently stands at about 2.4%. This big difference in yields says that interest rates in the U.S. are going to decline, which means stock prices are going down, too. So you better get ready because we might even get that long overdue market correction of 20% to 30% that we haven’t seen since the Financial Crisis of 2009.
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What should investors do?
Currently, I recommend buying the iShares Barclays 20+ Year Treasury Bond ETF (TLT). If interest rates and the stock market fall as I expect, investors will collect a handsome profit. And better yet, TLT carries an SEC yield of about 2.9% as reported by the mutual fund rating service Morningstar. This means even if the anticipated market downdraft doesn’t happen for another few weeks or months, you’ll get paid while you wait for an eventual decline to occur.
What’s more, the core of your portfolio should be in a carefully selected group of dividend-paying blue chip stocks that can grow through thick and thin and provide an ample cash-on-cash return. As the editor of the Safe Money Report, I’ve recommended a group to my subscribers that I call the Dependable Dozen.
You should also keep some powder dry to load up on gold using the SPDR Gold Trust ETF (GLD). Safe Money Report subscribers will get my signal about when the time is right to buy GLD as well as the appropriate allocation percentage based on market conditions.
Best wishes,
Bill Hall
Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.
{ 7 comments }
Thanks Bill , i will wait for your call , on when to load up on gold .
Dear Bill, I must have been on vacation or something because I do not have the Dependable Dozen in my files. I looked in tghe M & M achives but could not find anything listed that sounded like Dependable Dozen.
Please, let me know which issue has this list. Or even better, just send me the list, if you would be so kind.
It feels like the impending correction is near, to me. So, please send the list soon.
Thanks,
Tom Beach
Dear Bill Hall,
Your right-up is excellent and I fully agree with your thoughts. Here in India we have a stock market which is going berserk for the past one year without any proper fundamentals whatsoever.Warren Buffet, recently in an interview said that stocks in U.S are in no bubble when you compare it with the yield on the 10-year U.S bond.That sounded correct. However, when I worked out the same comparison in the Indian market, the result confirmed that the stock market here is in a total bubble. The 10 year here gives a yield of about 6.9%.The NIFTY here is trading at around 9100 with next year consesus forward earnings of around 450 which is also on the high side. So, the NIFTY yield comes to a mere 4.9%. If the yield has to climb to 6.9%, then the NIFTY should fall to around 6500, a 28% fall from its present level. If you go by P/E ratio it is even worse. The leading P/E of NIFTY is 9100/450= 20,22. Earnings are growing by barely high single digits on an average. The most logical P/E you can assign on that basis cannot be more than,.say 12.That will give a fare value of 450×12=5400. If I tell this to any one here, they will laugh at me, but then that is the hard truth. The banks here are in a mess with the real NPAs at about 13-15% and paradoxically this is the very sector which has lead the overall market with the argument that the worst for the sector is over.What has driven the market to these levels is pure liquidity, both domestic and foreign. For a big short-seller with deep-pockets India is a sitting duck.I would be interested to read your comments on the above story.
“You should also keep some powder dry to load up on gold using the SPDR Gold Trust ETF (GLD). Safe Money Report subscribers will get my signal about when the time is right to buy GLD as well as the appropriate allocation percentage based on market conditions.”
I’ve been trying to do my due diligence into the SPDR Gold Trust (GLD). Anyone know why there is a clause in the GLD prospectus that states GLD has no right to audit subcustodial gold holdings? Why would the organizations behind GLD forfeit this right and create such a glaring audit loophole? I have not heard a single good reason for the existence of this loophole thus far. It also doesn’t help that GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion. There are a number of other red flags as well from what I’m reading:
“Did anyone try calling the GLD hotline at 866â–ª320â–ª4053 in search of numerical details on GLD’s insurance? The prospectus vaguely states “The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody.” When I asked about how much of the gold was insured, the representative proceeded to act as if he didn’t know and said they were just the “marketing agent” for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.”
“I remember there was a well documented visit by CNBC’s Bob Pisani to GLD’s gold vault. This visit was organized by GLD’s management to prove the existence of GLD’s gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this “GLD” bar was actually owned by ETF Securities.”
Robert has a good point. How do we know that any ETF holds what they claim? Of course stocks are MUCH easier to buy and sell than physical metals. You would have to have UPS running back and forth all day long, and from where? In other words, if they buy gold where do they get it and where is that vault? The more I think about it, physical holdings of any commodity sounds real iffy. Maybe it is just too early in the morning. (-:
Trust nothing. Get the real stuff in your hands.. Gold bars from a reputable dealer..and buy shares in low-cost miners who produce. Can not lose, over time..Larry Edelson’s $5 oz gold call will transpire. The sovereign debt/default domino will help
Bill have you got any tips on whether the dollar is going to appreciate against the euro and the yen. The currency markets are just as exciting as the markets for gold and precious metals. Do you have any inside information about whether Janet yellen is gonna rise interest rates? Are you hawkish about interest rates? The late great professor Brendan Walsh said that economics was a dismal science. What about BMW economics?