Interest Rate Forecast
Interest Rate Forecast:
Now Through 2010
by Steve Sjuggerud, PhD
Editor, Daily Wealth
July 12, 2006
“Better buy that house now, before interest rates go up,”
-Every realtor, everywhere, for the last quarter century.
Most realtors in America believe that the day they’re granted their real
estate license, they also become experts in predicting interest rates…
And the prediction is always the same: interest rates are headed higher. Yet
nobody bothers to check their quarter-century track record. Realtors have
generally been wrong for a quarter century, as this chart of 25 years of
mortgage rates shows:
As you can see, the 25-year trend has been down… almost relentlessly.
And any time rates actually do start to tick higher - as they are now -
everyone gets in a panic.
If you’re going to trust someone’s interest rate crystal ball, it shouldn’t be
your local real estate broker’s. Instead, you ought to trust Bill Gross’…
Bill Gross, if you don’t know, is the world’s biggest money manager. He
controls at least $600 billion dollars, heading up the investments at PIMCO.
Bill’s got most of that money in bonds, so his interest rate forecasts are
incredibly important.
In his recent Investment Outlook newsletter, Bill shared with readers his
interest rate forecast for now through 2010. Not surprisingly, it doesn’t fit
at all with what your local realtor is telling you. Here’s what Bill believes
is the range we’ll see between now and 2010:
Tack on an extra percent to make a guess about what mortgage rates might do
over the next four years… putting them around 5.0% to 6.5%.
Bill comes to these conclusions logically. If you want to hear his
explanation, grab a cup of something containing caffeine, and read the next
two paragraphs:
“For now, the continuing influences of globalization, technology advances
furthering productivity, and asset destabilization policies… probably will
allow global inflation to remain in moderate range bound territory between
1-3% for most economies.
Global real yields then… should stay reasonably low – perhaps 2% on average
(lower in Japan)… Combining inflation, real interest rate, and term premium
considerations mentioned above we come to the range forecasts [above] for the
secular timeframe from 2006 until 2010.”
Your realtor (and to be fair, everybody else you know) believes interest rates
are headed higher.
Meanwhile, the world’s biggest investor thinks they’re at the high-end of
their range for the next four years.
Who are you going to believe?
When “the crowd” is so one-sided in its opinion, as it is now about interest
rates, the crowd is usually wrong.
I never make an interest rate bet. I don’t invest based on my guesses of
future interest rates. But if you were to twist my arm, I’d side with the
world’s biggest money manager and his multi-decade track record, instead of
your realtor.
Who are you going to side with?
Good investing,
~Steve
© 2006 Dr. Steve Sjuggerud
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