As someone who entered the investing business in 1980, it is very odd to see the central bankers of the world now focused on trying to increase inflation. Back in the day, inflation was the enemy. An enemy Paul Volcker was locked in battle with for years as runaway inflation threatened the very core of the U.S. economy after the oil shocks in the 1970’s.
Now fast-forward 30 years or so and one finds that today’s enemy is just the opposite. Today everyone is worried about and focused on the potential for deflation. As a result, central bankers from the U.S., Europe, and Japan have been doing their darndest to boost the official inflation readings over the last couple years.
The key appears to be that none of the world’s bankers want to see a replay of what happened in Japan from 1989 through, well, today. In short, a deflationary cycle took over twenty five years ago in Japan that has kept the economy stagnant and has been a cycle that so far at least, has been nearly impossible to escape.
As a student of the Great Depression, Ben Bernanke knew that a downwardly spiraling deflationary cycle was the biggest threat to the U.S. economy after the credit crisis ended. As such, “Gentle Ben” did everything in his power to push up the value of such things as stocks and real estate.
And although the unemployment rate in the U.S. has come down dramatically since 2009 and the economy now appears to finally be able to stand on its own two feet, Janet Yellen’s Fed is also taking no chances with deflation. While Yellen’s bunch did finally put an end to their latest and greatest QE program this week, they will continue to reinvest the income from the $4+ trillion in bonds they now own and will keep rates near zero for a “considerable time.”
The result of the U.S. Fed’s efforts on stocks and real estate have been nothing short of impressive. While home prices have not completely recovered from their bubbly heights, they have advanced smartly from the lows. And the U.S. stock market has enjoyed an advance of more than 200 percent since the dark days of 2009.
David Moenning is Mr. Moenning is President of Heritage Capital Research, a privately owned, investment research firm. Heritage focuses on active risk management and an “own the best and ignore the rest” equity selection strategy.
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Positions in stocks mentioned: none
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.