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When Low Interest Rates Collide With Growth Stocks, Expect Fireworks

The warning signs are flashing….

No, I’m not talking about an imminent stock market correction, like the one that was supposed to hit us earlier this month.

And no, I’m not talking about geopolitical risks, although they are not going away…

In quite a stunning turn of events, the big end of town — the investment bankers, economists and pundits — are finally coming around to my way of thinking.

Yes, Foolish readers, there is a growing realisation that interest rates really are staying low, for the long-term.

RBC Capital Market’s Su-Lin Ong said yesterday the RBA is likely to sit on its hands for even longer, well into 2015.

You can kiss good-bye to any thoughts of term deposit rates getting back to 4% any time soon.

On the contrary, as the big four banks embark on yet another mortgage rate war, expect them to cut term deposit rates even further from their already low levels. As a reminder, my 87 year old father just rolled over a term deposit, locking in the princely rate of 3.15% for the next seven months.

After tax, the uncomfortable truth for him and tens of thousands of other retirees, is term deposits are simply not keeping up with inflation.  From a spending power perspective, you are losing money by holding cash.

It’s when the herd start agreeing with me that I get worried.

My warning signs flash yellow.  Beware the investor who chases the crowded trade–dot com stock in 1999, mining stocks in 2007 and bank stocks in 2014.  The first two ended in tears.  The day of reckoning for bank stocks may still be ahead, although I’m not holding my breath.

“This time is different” are the four most dangerous words in investing.

At the risk of egg being splattered all over my face, I’m going to stick my neck out and say as far as interest rates are concerned, this time IS different.  They are low, and staying low, for years.

Get used to it, and position your assets accordingly. (Hint — by comparison to term deposits, dividend stocks look very attractive.)

Speaking of different, I must admit I was surprised to read Tim Toohey, chief Australia economist for Goldman Sachs Group, is sticking to his prediction that the RBA will cut interest rates next month.

In a finance world where the experts tend to hunt in packs, it’s refreshing to see someone stick their head above the parapet, and deviate from the norm. Most economists are predicting interest rates will remain on hold in September.

I think Mr Toohey is pushing water uphill, mind you.  Unless unemployment jumps even higher than its already elevated 6.4% level, the RBA is likely to sit on its hands in September.

Unless….

It’s the great cop out.

Yes, Foolish readers, everything is good, unless it’s not.

This time is different, until it’s not.

Meanwhile, these stock markets continuing to ride high.  If there’s one thing I’ve learnt in 25 years of active stock market investing, it’s that you don’t fight the markets, both on the upside, and the downside.

They always over-shoot.

On the way up, optimism turns to euphoria which turns to greed.

On the way down, caution turns to fear which turns to panic.

Rinse and repeat.

As to where we are now in the great stock market cycle, my guess is the market is cautiously optimistic.

Yes, there are some pockets of euphoria, and valuations of quality companies like REA Group Limited  (ASX: REA)Sirtex Medical Limited  (ASX: SRX) and SEEK Limited  (ASX: SEK) look stretched, but overall you could hardly describe the ASX as being in a state of euphoria.

All of which means, with the market finally realising interest rates will stay at these ultra-low levels for the long term, it could be a case of ASX 6,000 here we come.

And if we get anything near the greed phase, look out above.

Not that I’m making predictions, although I will say ASX 6,000 is just a matter of time. I just don’t know when.

Still with the S&P/ASX 200 Index riding above 5,600, there’s clearly money to be made, and I don’t intend missing out on the bargains on offer.

US stocks are closing in on record highs, with the S&P 500 Index rebounding at the fastest pace since February.

So much for that stock market correction…

Bloomberg reports

“More than $710 billion has been restored to American equities in the past month and the S&P 500 is within 0.3 percent of an all-time high amid bets that the Federal Reserve will leave interest rates near zero for longer…”

Tell me something new.

Tell me why anyone should be surprised US stock markets are riding close to record highs in the face of a rebounding economy and zero percent interest rates.

It IS different this time.

Shares in tech giant Apple jumped above $100, closing at a new record high. Just a guess, but it might have something to do with the upcoming launch of the iPhone 6.

I’m a buyer… of the iPhone 6 that is. I already own the stock.

Regular readers will remember last month I said…

“Apple’s stock is hardly expensive, trading on a forward price to earnings (P/E) multiple of less than 14. It even pays a dividend, the forward yield being around 2%.”

Since then, the stock is up 6.5%.

Not bad.

I know US stocks are not for everyone. They don’t pay fully franked dividends. There is a currency risk. Trading costs are higher. Popular brokers like Commsec and E*Trade require investors to fill out some extra forms. In short, there’s a hassle factor.

And all that’s before you even get into working out which US stocks to buy.

As for the currency risk, with pundits lining up to predict the Aussie dollar is set to fall against the greenback, the odds are you’ll make money buying US stocks with your Aussie dollars.

In anyone’s language, it’s a potential win-win situation.

Back to the ASX…

Reporting season is in full swing, with the aforementioned Sirtex Medical and SEEK both releasing results today.

Both are up big since we tipped them to Motley Fool Share Advisor subscribers — Sirtex up 226% and SEEK up 161%.

Both are top notch companies, potential fortune makers.

My guess is it means do nothing. Keep holding. Keep letting the shares compound higher and higher, for longer and longer. Keep running those massive profits.

All good things come to those who wait. But, you’ve got to be in it to win it.

A value price tag + growth + big dividends!

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Of the companies mentioned above, Bruce Jackson has an interest in Apple.

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