Dear Investors,
Introduction
Through the end of Q3-2022, using quarterly data, the stock market has returned almost 184% from the 2007 peak.
The critical takeaway is that while the Fed’s policy of low-interest rates pushed capital into the financial markets.
It did so at the expense of economic growth.
The debt accumulation needed to sustain a “living standard” has left the masses dependent on low rates to support economic activity.
Most likely, the Fed’s “7% solution” will solve the inflation problem caused by the massive stimulus injections following the pandemic.
Unfortunately, the medicine will most likely kill the patient in the process.
The enormous debt load is the most crucial difference between applying the “7% solution” today and in the 70s.
Today, consumers, businesses, and even the Government depend on low-interest debt to sustain an ongoing spending spree.
A “7% solution” could pop the massive “debt bubble,” leading to severe economic consequences.
Just recently, James Bullard, President of the St. Louis Federal Reserve, suggested the central bank might need to employ the “7% solution”.
To ensure the complete destruction of inflation.
As real investment advice has discussed previously, the fear is repeating the policy errors of the late 1970s that led to entrenched inflation.
Trying to increase the Fed funds rate to 7%, 2.5% higher than they are currently, risks triggering a catastrophically deep recession.
The reason is the 2020 inflation was the result of one-time artificial influences versus the 1970s.