Market Beat: Inflation and investing |

Market Beat: Inflation and investing

George Bernard Shaw once said, “If all the economists were laid end to end, they’d never reach a conclusion.”

That quote seems to be more pertinent today than ever. Our economy is still sluggish, though growing, and the Fed is taking unprecedented measures to provide for full employment and to maintain price stability.

Milton Friedman made a statement regarding monetary policy way back in 1967 that could really ring true today when he said, “…we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and, as a result, in danger of preventing it from making the contribution that it is capable of making.”

Friedman made that statement to the American Economic Association shortly before the onset on the “stagflation” period of the 1970s, when we had inflation, a stagnant economy and a long period of poor performance for the stock market.

Today’s actions by the federal reserve are unprecedented; interest rates are low and the Fed is embarked on a policy of easing known as QE, in which they purchase about $85 billion per month in U.S. Treasury bonds and mortgage-backed securities. Ben Bernanke, the chairman of the Fed, has said that he’ll continue with the QE until the unemployment rate declines or we start seeing signs of inflation.

The stock market has been very sensitive to any remarks chairman Bernanke makes regarding quantitative easing. After the last meeting of the FOMC, the market sold off sharply as investors thought that Bernanke indicated that the fed may taper the QE program.

There are pundits who believe that the Fed can’t taper without causing a market decline. Bernanke thinks that by reading the data and communicating changes in advance, he can ease off the easing without an adverse effect on the market.

One thing that investors should be wary of is signs of inflation. In an inflationary period, money will lose its purchasing power over time; younger people investing for retirement need their portfolio to keep pace with the rate of inflation just to maintain their purchasing power.

Income-oriented investors who in have some of their portfolio in bonds need to be sure that they are not locked into long term bonds in a time of inflation and rising interest rates.

Bernanke’s term will be up in January 2014 and it will be interesting to see who his successor is and how if the same monetary policy is continued.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.

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