There’s a reason so many people hang on the words of the Warren Buffetts of the world. While not everything that may come out of their mouths is something you should follow, it’s always worth paying attention to them in case you get some small nugget of useful information.
The big boys play at a different level than the rest of us, with access to amounts of capital that most of us can only dream of. They also have instantaneous access to buying and selling in markets, something that ordinary investors aren’t able to do. That allows them to take advantage of opportunities that present themselves in a way that many of us can’t replicate.
So when it comes to investments in individual stocks or bonds, those of us on Main Street may not be able to perform as well as those on Wall Street. But when big investors start talking about trends in various asset classes, it’s worth paying attention to them. They see the big picture, trends in investments, and what’s happening on a daily basis, which makes their insights potentially valuable.
With that in mind, what are major investors today saying about different investment assets, and is it worth paying attention to them?
The saying “cash is trash” has a long history on Wall Street. There are two reasons for that saying. On the one hand, holding cash when markets are growing by leaps and bounds is a great way to miss out on great investment gains. That’s particularly true if you have cash and decide to wait to “buy the dip,” as that perfect buying moment may never come.
On the other hand, holding cash as an investment asset is a guaranteed loser due to inflation. Even at an inflation rate of “only” 2%, you’re taking a guaranteed loss. And in an environment like today, when inflation is climbing at rates we haven’t seen in decades, holding cash is a worse bet than ever.
Don’t think that bank savings accounts are an answer either. Even when interest rates were well above zero, those interest-bearing accounts lost money to inflation. The bottom line is that there’s nothing wrong with holding cash if you need money for a rainy day, or if you’re saving up to buy a car, or if you need liquid funds for everyday expenses. But aside from that, cash is a loser.
Bonds aren’t much better, at least according to legendary bond investor Bill Gross. The problem with bond markets is that yields are incredibly low, even historically low. In fact, a whopping $16.5 trillion of debt in the world today is actually negative-yielding, meaning that it yields a negative interest rate.
Let’s put this another way. A bond interest rate of 0% means that the bondholder holds a bond and gets nothing in return. It’s essentially like holding cash, only the value of the bond could go up or down. If it stays at zero, you’re guaranteed to lose money due to inflation.
But a negative interest rate on a bond means that you’re paying someone to own their debt. You’re guaranteeing a loss above and beyond what you would lose if you just held cash. And yet there are $16.5 trillion that would rather hold those negative-yielding debt instruments than hold cash. That’s how screwed up bond markets have become.
Gross’ problem with bonds is that with such low yields, they’re bound to go up, and quickly. And since bond values are inversely correlated with prices, rising bond interest rates means falling prices. By Gross’ estimation, real returns on bonds, even those with positive interest rates, will be negative in the future.
Gross is similarly negative on stocks. In his opinion, earnings growth needs to be in double digits in order for stock prices to support high valuations. If earnings fail to reach that level, then stocks may not be worth their currently overvalued levels.
As it is, stocks may very well be on the verge of a selloff, particularly if President Biden is able to get the full extent of his tax increases passed into law. A good many investors may end up finding out the hard way that what goes up must come down.
Aside from the usual financial assets towards which most investors gravitate, precious metals like gold and silver form one of the most popular alternative asset classes. And major investors are incredibly bullish about the future of precious metals.
Noted investor Mark Mobius has endorsed his version of the golden rule, stating that he believes every investor should hold at least 10% of their portfolio in gold. He believes that currency devaluation is going to pick up as a result of the massive amounts of stimulus that have been dumped into the economy in recent months. And in his view, gold is one of the best ways to protect against that devaluation.
Legendary investor John Paulson is another one who trusts gold, saying in a recent interview that the “logical place to go is gold, especially if it starts to rise in inflationary times. But because the amount of money trying to move out of cash and fixed income dwarfs the amount of investable gold, the supply-and-demand imbalance causes gold to rise, and the more it rises – it sort of feeds on itself. It has the potential to go parabolic.”
With such big names endorsing gold, it’s certainly worth taking a look at. After all, if Mobius and Paulson are correct about inflation and currency devaluation, you’re going to want to find a safe haven asset to help protect your wealth.
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