Tuesday, May 17, 2005

The Peridot Capitalist: Market Struggles As Fed Unlikely To Stop

The Peridot Capitalist: Market Struggles As Fed Unlikely To Stop

I enjoy reading Chad Brand. His insights are valuable to the serious investor.

The market has been going sideways while the FOMC "catches up", this does not mean the market is going down the next time rates go up a notch. Indeed, the very reason the FOMC needs to "catch-up" is because of the pump priming done after September 11, 2001. The down trend in inflation started 25 years ago. After such a long decline and the recessionary effect of 9/11, the FOMC had to be careful not to let the US economy deflate--as happened in Japan at the end of the 90's real estate bubble.

The risk of deflation has subsided and the US economy has performed very well for the past couple of years. Chad is correct that most people believe that the FOMC will make the classical mistake of continuing to tighten beyond the need. The quarter point moves have been perfect. The mini commodities bubble was deflated without killing the economy. Now it is just a mater of time before equilibrium between short and long rates is reached.

Chad believes there are few who believe the FED will stop raising rates soon. I am one of the few. Even if I am wrong, the real point is that the economy is growing, profits are growing and stocks will go up. Rising interest rates indicates there is demand for money. Rising interest rates is a good thing. Rates always rise when the economy is strong!