In the latest update to the Rick’s Picks home page, I’ve revised an interest rate forecast for the 30-year bond to — better sit down for this — 0.73%. This is an implied recession/depression away from the current 1.60%, so you may want to jot the new number down. I got a wake-up call on this from my friend Doug Behnfield, whose name will be familiar to anyone who has followed Rick’s Picks for a while. Doug, a Boulder-based financial advisor at Morgan Stanley, is not only the smartest investor I know, he is one of the smartest guys. He’s been loaded to the gills with muni bonds, among other investables, and is having the kind of year with them that even Soros or Buffett would envy. Doug called this afternoon to ask about the 1.58% interest rate target I’d proffered a while ago for the 30-Year T-Bond. I had thought this number would correspond to a still unachieved 186^04 target in the futures contract, but I was way off. This discrepancy aside, how confident am I that long-term rates will fall to 0.73%? Very. Drop by the Rick’s Picks Trading Room sometime if you’re curious about how often these high-confidence predictions hit the bullseye. Here’s a link to a free two-week trial that doesn’t require a credit card.
Liquidity Is a Coward
If long-term rates are in fact headed well below 1%, it would imply that a deep economic slump is coming. As for stocks, Doug thinks the eager buyers that have powered the bull market for 11 years are about to vanish from the scene. ‘Liquidity is a coward’, he notes, recalling an observation frequently tied to Ray Devoe. A article on the subject at Nasdaq.com explains: “Money will flow to where it is best treated. If the markets should be declining, then the potential buyers can step aside, allowing the markets to fall into a vacuum created by their absence. This process becomes self-actualizing as lower prices generate margin calls, which begets forced selling, more impatient (and frightened) sellers, and ever-lower prices.”
Just so. For Baby Boomers in particular, this could pose a serious problem. They have 75% of their liquid net worth in S&P 500 stocks, notes Doug, and the robust liquidity that rising markets have provided has gotten them used to treating their stock portfolios like cash. They could be in for a rude awakening if they have to raise money in a hurry by selling, say, Apple shares when they are falling. Doug thinks the S&Ps could come down as hard as Nasdaq stocks did when the dot-com bubble burst in 2001. If this happens, he says, financial advisors will be ruinously telling their Baby Boomer clients to sit tight. For now though, he says, ‘complacency is unbelievable.’