In my fall 2007 newsletter article titled “Moving to Higher Ground,” I wrote, “A major earthquake, in the form of the sub-prime mortgage crisis, has unleashed a tsunami that will engulf most residential housing markets and have significant repercussions for the economy in general.” And, “I have begun selling stocks in client portfolios in order to reduce our exposure to what I believe will be a very frightening economic environment for the unprepared.”
For the unprepared, the ensuing panic is worse than I imagined. With the exception of U.S. government bonds, investors are fleeing or have been forced to sell out of traditional safe havens such as high-grade bonds. So frightened are investors that they will currently accept less than 1% return just to be in extremely safe U.S. Treasury bills.
The flight to safety is not sustainable. At current interest rates, there simply isn’t enough return offered in the long run. At some point, money will flow back out of these extremely safe assets into very safe assets with much higher returns – pushing prices up.