Japan is cutting interests ratesto virtually zero. This means investments in Japanese debt are as good as putting your money under your mattress; the money will likely still be there but when you get your yen back, don't expect any rate of return. What could be worse, purchasing power is likely to be impacted even with minimal inflation. Japanese drama continues.
So what about the United States?
Economic growth in the U.S. is very sluggish and no matter what the experts say - that the recession is over - it still feels a lot like a recession. Purchasing power for most Americans has declined over the last several years with collapsing real estate values and a massive correction in the equity market. Coupled with 10% unemployment, this struggling recovery looks to be a stumbling one at best.
Because of this muted recovery, Rates are likely to be heading down (or at lease staying flat) over the next 12 months as I believe economic activity will simply not be strong enough to merit tightening of the money supply. For that reason, short to intermediate term fixed income positions have merit as long as one is tactical and watches economic growth patterns carefully. As for long-term fixed income, we believe you need to be very careful investing in longer maturity fixed income assets. If there is a bubble in the fixed income market we believe it's in longer-term maturities (and Treasuries).
Is the United States the new Japan?
Well, rates aren't at zero right now but they are moving in that direction.
With the Federal Reserve appearing likely to engage in additional quantitative easing measures, there is obvious speculation that rates are headed down yet again.
Low rates indicate a slow economy and central banks use low rates as a way to stimulate economic activity. And there is general agreement that the American economy needs stimulation.
"Investing in shorter-term fixed income is still a reasonable investment given the conditions we face today."
One thing you should keep in mind when investing in fixed income is that the parallels between Japan and the U.S. are not all uniform. The U.S. is a much different economy from Japan and we do not expect a similar type of stagnation that we have seen with the Japanese economy. Still, be aware that the massive infusion of the liquidity into the market could very well have a future inflationary impact. I do not expect hyperinflation but there is every reason to believe that inflation will reappear if consumer demand recovers, banks stabilize, massive money supplies remain, and an accumulation of unprecedented deficits lingers. Lots of ifs.
Investing in shorter-term fixed income is still a reasonable investment given the conditions we face today. If interest rates do go to zero or drop further, you make some capital gains from your fixed income assets and will be gathering yield from these higher return positions. Just be aware that there are risks when investing in fixed income and watching the direction of economic growth and interest rates is critical as you tactically adjust your portfolio.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org