The Sins of the Past

Wow. I never thought that I’d see it happen. The Federal Reserve, that mysterious, secretive, “quasi-governmental” entity that has made a regular habit of thumbing it’s nose at the general pubic and the day to day performance of the market, has succumbed. They have fallen. They have gone over to the dark side and made a wholly populist decision.

And unfortunately it’s not just the Fed – it’s a number of other central banks around the world as well. They all blinked. Or more appropriately, they all made a knee-jerk reaction and dumped nearly $300 billion dollars into the economy, nearly overnight, simply because stock markets around the word were adjusting. And they stand at the ready to add more. Their actions typically have the impact of dropping a rock into a lake; this is more like dropping a boulder into a mud puddle. Talk about inflationary pressure! Paul Volcker would be turning over in his grave if he weren’t still alive.

Ever since the days of malaise, aka Jimmy Carter, aka stagflation, the Fed has held as it’s main policy goal the limiting of inflation. After seeing the damage that rampant inflation had on the economy, that has always seemed to be a prudent choice. And they have executed the policy with such dogged persistence that they have, on occasion, come close to tanking the economy through their ever increasing interest rates.

But overall they have been very successful in battling inflation. In fact, they have perhaps been too successful, because right now there is an entire generation of adults out there that have never experienced it, and probably another whole segment of the adult population that did experience it but that has since forgotten about it. And as the philosopher George Santayana wrote back in 1905 “Those who cannot remember the past are condemned to repeat it.”

Hold onto your brokerage account statements, because it appears that that’s exactly what’s about to happen.

If you can’t (or just don’t want to) remember the impact that inflation has on the stock market, let me refresh your memory a bit. I went back and did some research on the DOW average between 1978 and 1981, the years of some of the highest inflation rates every recorded in the US. On December 31, 1977 the DOW closed at 831.17. On December 31, 1981 it closed at 875.00.

So over four years the average closed a total 43.83 points higher.

A whopping 5.3%. Over FOUR years.

So say goodbye to your IRA and 401k returns if you’re invested in stocks.


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