Don't Fear The Inflation Reaper

by: Keith Springer


Why are stocks going higher?

The two kinds of deflation.

What is the new industrial revolution?

Welcome to the New American Industrial Revolution

The world is on pins and needles awaiting the Federal Reserve. I know, I know, it seems like we're always awaiting one decision or another from the Fed, and this time is no different. This time, we're trying to figure out if Janet Yellen and her boys are going to raise interest rates anytime soon, and if so, when. The odds are on the first quarter of 2015, but with this I disagree.

There is no doubt that a sudden increase in the Fed Funds Rate, and thus overall interest rates, will spook investors. The evidence is obvious, as each time we get any type of inflation scare, the market plummets. With this I agree. Once rates start rising, the market will likely begin its long overdue correction and bear market, which will be ugly.

However, I don't see that anytime soon for one simple reason: we are still in a deflationary cycle, and rates may not rise for several years!

We are actually witnessing two types of deflation right now. The first is what "Facing Goliath - How to Triumph in the Dangerous Market Ahead" is all about. The 90 million baby boomers are well past their spending age. People spend the most in their 30s and 40s as family demands take precedence, and then taper off at around 50.

Of course, we don't just shrivel up and die at that point. We just don't use 3 tanks of gas per week taking junior to soccer practice and piano lessons, buying them clothes they don't wear out, while getting eaten out of house and home. We actually do enjoy 3 things after 50: Nice wine, fancier cars and more exotic travel. Sound familiar?

Currently, we have only 65 million Gen-X'ers behind who can't possibly keep up with the spending power of the 90 million baby boomers. That's deflationary. Fear not for the long term of America, though. The good news is that we have a powerful generation in the wings that will create another roaring '20s. They are the echo boomers, the kids of the baby boomers, who are 85 million strong. The bad news is that they do not hit their peak spending years until 2023, which will start to get built into the stock market about 2018, and this is why the Fed has been so aggressive. We just have to get through the next 4 or 5 years, which will certainly be rocky if you are not invested properly.

The second deflationary pressure is emerging from a new industrial revolution... actually 5 new industrial revolutions occurring in the nation: alternative energy - which can be immediately felt at the gas pump, as we're seeing gas under $3 a gallon, which acts like a tax cut in the thousands of dollars for each American family, biotechnology, healthcare, technology and transportation.

We get the benefit of all this at a time of low interest rates and energy costs, which means higher corporate profits. The market seems to understand all this, which is why the Fed's exit quantitative easing in recent months didn't hurt investors. After the first industrial revolution started during the 1820s, when we saw the transition to modern manufacturing, we had decades of growth, declining inflation and a booming stock market. Of course, when you're in the middle of it, you don't always see it. It took until the 1840s for people to realize what started in the 1820s!

Investor Strategy

The momentum is positive, and patient investors will be rewarded in this market. I expect the market to rise through the end of the year, and investors should focus on strong growth companies, such as Apple (NASDAQ:AAPL), as their sales have been through the roof and China sales are soon to make an impact; Microsoft (NASDAQ:MSFT), which is the staple for every computer made; Intel (NASDAQ:INTC), which is enjoying a major multi-year breakout; Google (NASDAQ:GOOG), whose growth potential is in the stratosphere; Netflix (NASDAQ:NFLX), which is revolutionizing media delivery and will have the earnings to prove it; and Facebook (NASDAQ:FB), a social media staple and is winning over the older crowd, which are the people with money. For a broad-based approach, you can simply buy the market ETFs like the PowerShares QQQ Trust ETF (NASDAQ:QQQ) and the SPDR S&P 500 Trust ETF (NYSEARCA:SPY). If you are cautious and want to play the downside, or want some portfolio insurance, look towards the ProShares Short S&P 500 ETF (NYSEARCA:SH) or the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.