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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerThe Associated Press reports that wholesale inflation rose 1% in January, its fastest rate in 16 years. This is another piece of evidence that the Fed's rapid interest rate cuts are having their expected effect -- reinforcing inflation. And as more economists forecast a recession this year, the looming specter of stagflation approaches ever more closely.
This means that the market will fall this morning, right? Actually, it looks like despite the good news about bond insurers maintaining their AAA ratings, the market has reversed its early upward direction and turned south because the inflation news was worse than expected. This change in the market makes sense to me.
As I pointed out in my stagflation post, these short-term fluctuations are not meaningful for long-term investors. What may be of interest is that during the 1970s -- a period of low economic growth and high inflation -- the market was essentially flat for a decade. It took a 19% Fed Funds rate from then Chairman Paul Volcker to break the back of inflationary expectations and get us on a path of growth.
That attention to the Fed's role as inflation fighter will not reappear under the current Chair. This means that investors should look towards companies most likely to benefit from inflation -- many of which are hitting new 52-week highs.
Peter Cohan is President of Peter S. Cohan & Associates. He also
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Reader Comments (Page 1 of 1)
2-27-2008 @ 9:34AM
Dave Houle said...
Interesting how free people entering into free financial agreements get into trouble by having unrealistic hopes, wishes and pipe dreams suddenly become the fault of an innocent third party for political points( i.e. Mr. Bush's fault). The pain finacial institutions are feeling along with their shareholders should cause both to assess the leadership, policies and ethics of their companies senior management. That Mr. Cohen is management 101.