When the Federal Reserve was reducing short rates in 2002, there were rumors that the nominal rates would drop to one percent...
May 2, 2005 (Press Release) --
When the Federal Reserve was reducing short rates in 2002, there were rumors that the nominal rates would drop to one percent, which they did along with real yields going into the negatives, which they still have not yet recovered. Of course financed based corporations increased their profits margins and gained notable cash flow increases which in turn made the Dow 5000 level of value almost obsolete, fortunately stocks endured the declines.
It is only obvious that the increased profit margins and the notable cash flow increases were due to lower yields, but as the nature of forward earnings are unpredictable, we must look on how to steer clear of the Dow 5000. The only reason we are higher than the Dow 10,000 is because of more predictable interest rates, they dropped and will stay low. One needs to understand the full story of disinflation.
When inflation dropped to rock bottom, bringing everything else with it, such as interest rates, several repercussions happened. Price investors were ready to disburse for future incomes if they had expanded which of course would make them available at a discount with the dropping interest rates, which in-turn made bond prices go on the rise. When disinflation reached its base, future returns started to be compared to current true interest rates. Predicted future inflation rates are close to 5 percent, resembling the power that real interest rates had on asset pricing such as real housing appreciation, which can go either up or down during periods.
However real appreciation and depreciation are related to periods of low and high interest rates.
It is only obvious that the increased profit margins and the notable cash flow increases were due to lower yields, but as the nature of forward earnings are unpredictable, we must look on how to steer clear of the Dow 5000. The only reason we are higher than the Dow 10,000 is because of more predictable interest rates, they dropped and will stay low. One needs to understand the full story of disinflation.
When inflation dropped to rock bottom, bringing everything else with it, such as interest rates, several repercussions happened. Price investors were ready to disburse for future incomes if they had expanded which of course would make them available at a discount with the dropping interest rates, which in-turn made bond prices go on the rise. When disinflation reached its base, future returns started to be compared to current true interest rates. Predicted future inflation rates are close to 5 percent, resembling the power that real interest rates had on asset pricing such as real housing appreciation, which can go either up or down during periods.
However real appreciation and depreciation are related to periods of low and high interest rates.
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