“Good Deflation”

My guess is by the time this missal wings its way through cyberspace to your computer, phone, etc., the investment world (media in particular) will have shifted its attention to ‘bad inflation‘ and the prospects for higher interest rate increases on the part of ‘inflation watchdog’, the United States Federal Reserve Bank. These are indeed frenetic times we live in … definitely red meat for the media.

In an attempt to conduct a preemptive strike on the next occurrence of ‘Bad Deflation’ rearing its ugly head, I wanted to share with you a write-up by another former client and friend, Bill Greiner, Chief Investment Strategist at Mariner Wealth Management. Bill’s February investment letter to Mariner’s clients makes some very thoughtful points why the seeming lack of inflation (and some disinflation) in certain segments of the world economy should not signify bad times ahead. If this is one of your present concerns, please take a look at “Good Deflation.” It might help get you to back off a potentially bad decision.

But who cares about deflation anyway?

‘Cause Friday it was back to the basics. A great Jobs number (supposedly the best in 17 years), continued good earnings out of corporate America and the market is back focusing on ‘when will the Fed begin to raise interest rates?’ I say (and I hate to be so cavalier about it), “who cares?” Interest rate rising from here will signify a much healthier economy and, that we really have past the crisis. Unemployment is at 5.7% and jobs are continuing to grow at healthy pace.

Now, the market’s initial reaction to this will probably be negative (history would tell us that), but rates will continue to be historically low (even as they move up), as the Fed will take a gradual in approach … ergo, a prolonged period of gradually rising rates. History would indicate that may not be a bad outcome. Take, for example, the period between 1950 and 1968:

Over that 18-year period the prime rate ( the rate that banks charge their best corporate clients) moved from 2.25% to 8.5%. During that same period the S&P 500 (historic prices) ran from 16.66 to 108.37 (the peak of that secular bull market), up 550%. Subsequently, December 19, 1980, it hit an all-time-high of 21.5%. Today it stands a whopping 1% above the 1950 level and 6.59% below the average prime rate between 1947 and today. I’m thinking 4% or 5% on the prime is not going to kill us, not to mention, how this will benefit all types of lenders, including those afraid to be in the market. 

What is your take?

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