• You’ll never believe former Fed Chair Greenspan’s shocking admission
Former Federal Reserve Chairman Alan Greenspan says the world’s excess banking reserves are “tinder that has yet to be lit.”
Greenspan made the candid comments to investment newsletter editor Brien Lundin. He believes the end of the Fed’s money-printing program—“quantitative easing,” in banker speak—has sowed the seeds for a “significant market event.”
Some analysts believe the event may be a stock market crash or prolonged recession (listen from 3:05 to 6:20, below). Greenspan also noted gold would be “measurably higher” within five years from the money-printing mayhem.
Now, PBRG subscribers who follow our 2015 Asset Allocation Guide have protected themselves against a “significant market event.” But a Fed announcement raising interest rates will send market volatility soaring. Certain rate-sensitive assets—like most bonds and several stock sectors—will be decimated when interest rates do rise.
Teeka Tiwari, editor of Mega Trends Investing, calls the resulting market chaos “Income Extermination.” He explains how rising interest rates are the biggest threat to your portfolio in the piece below…
• These “safe” investments are the biggest threat to your portfolio today
From Teeka Tiwari, editor, Mega Trends Investing: Rising interest rates are the biggest threat to your portfolio today. As interest rates rise, bond prices fall (and vice versa).
This concept took me a while to wrap my head around. Let me explain how this works…
Bonds and interest rates have an inverse relationship. “Income Extermination,” the event that’s about to unfold, is built around the idea that interest rates will rise. And I believe they will rise dramatically.
What does this mean to bond prices?
Imagine it’s 1965, and you own $300,000 worth of 30-year term bonds with an interest rate of 4%. But then, between 1965 and 1981, interest rates rise from 4% to over 15%.
Now it’s 1981 and you still have 15 years left before your bonds hit their maturity dates.
Remember that you can sell a bond whenever you want. But if you sell a bond before its maturity date, you’ll receive only what you paid for the bond and only if interest rates are at the same rates they were when you first bought the bond.
Think about it like this: If rates were 4% when you bought your $300,000 worth of bonds, you’ll receive $12,000 in interest. But remember: Interest rates have risen over the time you’ve owned those bonds. (In our scenario, they’re now at 15%, not 4%.)
That means another investor, like your neighbor, can buy the same $300,000 worth of newly issued bonds… except, due to the higher 15% interest rate, he receives $45,000 per year (instead of your $12,000).
Now, who would want to buy your 4% bond for the full price you paid for it?
The answer is: no one.
So, as interest rates rise, the value of your hypothetical bond portfolio would drop… until the return on your 4% face value bonds can match the return offered by current 15% bonds. For that to happen, the price of your bond would have to decrease.
Your $300,000 in 4% bonds drops to $80,000. At that price, the $12,000 per year interest payment would provide a 15% yield.
That’s more than a 73% drop in value over just 15 years. And that’s how devastating owning bonds can be when interest rates rise, as they are about to.
Now you know how dangerous these so-called “safe” instruments can be. Plus, it’s not just bonds…
There are entire industries—and certain stocks—that can and will get hammered. In my special report entitled “How to Survive and Prosper in the Coming Income Crisis,” I show you exactly which stocks and sectors to avoid as Income Extermination sends interest rates soaring.