September 18, 2009
Entry #6 on my list of the 10 biggest mistakes investors make is failing to focus on the Fed’s federal funds rate beacon. Today the fed funds rate is basically zero. That means rates have only one way to go-up! Interest rates have been in a decade-long decline. But as you can see, the decline is over. The last big run-up in the fed funds rate occurred in the 1970s, when it soared to almost 20%. The ’70s were a decade of booming inflation as the Consumer Price Index (CPI) hit 20%, and not surprisingly the stock market in the ’70s went nowhere. By the early ’80s, the unemployment rate rocketed to over 10%, from about 3% before the decade-long run-up in inflation and interest rates. Today, prior to the coming advance in inflation and interest rates, the unemployment rate is already near 10%, as compared to the approximately 3% rate that preceded the ’70s. It gives me cause for concern – how about you? If rates and inflation have nowhere to go but up, might that not lead to considerable economic stress and a new recession featuring higher rates than we have seen in our lifetimes? The conservative answer, of course, is yes. I’ve been laying the groundwork for the above scenario in my monthly strategy reports and at our family investment firm (younginvestments.com). I invite you to join us to stay in touch as the above scenario unfolds.
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