There is one indicator more than any other that determines the health of an economy and that is the Real Rate of Return. Also, this is the simplest of all the indicators to understand because it determines the safety of the assets. The next time you hear TALKING HEADS discussing the nuances of the markets, filter what they say through your own understanding of the Real Rate of Return.
The Real Rate of Return is the only number that determines the safety of the principal. It is calculated by taking the current BOND YIELD and subtracting the expected INFLATION rate. The result is the REAL return on the government’s gigantic money.
Interest rates are rising as we expected and this pressure has put enormous pressure on the stock market. The essential simplicity at work here is very, very basic. If bond interest rates yield 5.14% and inflation is forecast at 5%. The difference is the REAL RATE of RETURN, (in this case we are talking about .14%). The REAL RATE of RETURN is what causes the major ups and downs on Wall Street.
The reason for this is that the bond market is the largest financial market in the world. There are literally trillions of dollars invested in debt-denominated assets. These investors are primarily interested in the safety of their capital and taking as little risk as possible. Historically they have been delighted with REAL RETURN RATES which would be in the 2% – 5% per annum. During the 1970s, this indicator turned NEGATIVE for a time, indicating that INFLATION was rising faster than interest rates and that BOND INVESTORS were actually making substantial negative returns. During this time there was much “screaming and gnashing of teeth”.
I have always believed that the key task of Federal Reserve Chairman Alan Greenspan is to keep the REAL RATE of RETURN as high as possible. HE has been very successful in doing this. If he rereads any history of the financial markets, he would be wise to view events through this indicator. The economic climate becomes noticeably different and people’s opinions change drastically when the SAFER REAL RATE of RETURN on investments is threatened.
A deep understanding of this simplicity is necessary for success in any type of investment, as IT is the building block on which all other analysis is based. Although it is always difficult to predict what will happen in the future, the only factor you can count on is that when the REAL RATE OF RETURN is falling, there is a lot of SWEAT on the foreheads of the money managers who monitor the trillions of dollars that are they trust them. .
At this point KEEP YOUR EYES on this indicator and make your own INFLATION forecast. You will realize that your ANALYSIS can be better than the Big Boys.
Let’s be careful there!
dowjonesfully,
-Harald Anderson
http://www.eOptionsTrader.com.