The Markets

Exceptional . . .exceeds expectations . . . meets expectations . . . needs improvement . . . unsatisfactory. It’s a rating system familiar to anyone who has ever received a performance review. Right now, the performance of inflation is not meeting expectations – and that may be a good thing.

Critics of loose monetary policy and rock bottom interest rates have had high expectations for inflation. That is, they have predicted inflation will rise. In March 2012, Martin Feldstein, a professor of economics at Harvard and President of the National Bureau for Economic Research, explained the massive liquidity created in the United States by the Federal Reserve’s easy money policies created a risk of rising inflation. A rapid increase in bank credit would boost the money supply and the rate of inflation unless the Fed raised interest rates in a timely way and on an adequate scale.

So far, low interest rates and unusually aggressive monetary policies haven’t led to higher inflation in the United States or other at-risk regions. The Conference Board’s Harmonized Index of Consumer Prices (HICP), an inflation measure, showed prices in the United States increased by 0.8 percent in September 2013. That’s slower than the 2.1 percent increase reported for 2012.

In the Eurozone, the inflation rate for October fell to 0.7 percent, which was the lowest in almost four years. A recent article in The Economist explained it like this:

“So, why haven’t we had the inflation that some predicted in the wake of quantitative easing? The reason is that central banks are not the only, nor indeed the main, money creators. Money is usually created by the private banking system and that has been trying to shrink. If the money supply is a bath, then the central banks may have turned on the taps, but the commercial banks have pulled out the plug.”

That may mean, despite stable and falling inflation rates in some regions, we’re not out of the woods yet. As Mr. Feldstein wrote last March, commercial banks could begin to lend funds to firms and households. If that happens, “Loans could add to deposits and cause the money supply to grow. They would also increase spending by the borrowers, adding directly to inflationary pressure.”

Data as of 11/1/13

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.1%

23.5%

23.4%

14.2%

12.8%

5.2%

10-year Treasury Note (Yield Only)

2.6

NA

1.7

2.6

3.9

4.4

Gold (per ounce)

-3.0

-22.9

-23.9

-1.2

12.4

13.1

DJ-UBS Commodity Index

-2.9

-10.9

-13.4

-5.6

-1.2

-0.1

DJ Equity All REIT TR Index

-1.3

7.8

11.1

12.2

16.2

9.8

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

Best regards,

Jonathan K. DeYoe

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added. This newsletter was prepared by Peak Advisor Alliance.  Peak Advisor Alliance is not affiliated with the named broker/dealer. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.  The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association. The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones. Yahoo! Finance is the source for any reference to the performance of an index between two specific periods. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. You cannot invest directly in an index. Consult your financial professional before making any investment decision.

Sources:

http://blogs.wsj.com/economics/2013/11/01/feds-lacker-admits-inflation-fears-proved-unfounded/

http://www.nber.org/feldstein/projectsyndicatemarch2012.pdf

http://www.economist.com/blogs/buttonwood/2013/11/economics-and-markets

http://taxfoundation.org/sites/taxfoundation.org/files/docs/2014%20State%20Business%20Tax%20Climate%20Index.pdf

http://www.census.gov/popest/data/maps/2012/popsize-2012.html

http://www.kiplinger.com/slideshow/taxes/T054-S001-10-most-tax-friendly-states-in-the-u-s/index.html (These states are listed in the first six slides in the slide show)

http://www.kiplinger.com/slideshow/taxes/T054-S001-10-least-tax-friendly-states-in-the-u-s/index.html (These states are listed in the first six slides in the slide show)

http://www.kiplinger.com/slideshow/retirement/T006-S001-10-most-tax-friendly-states-for-retirees/index.html#KpQEfyMK0E4oYdBE.99 (These states are listed in the first six slides in the slide show)

http://www.kiplinger.com/slideshow/retirement/T006-S001-10-least-tax-friendly-states-for-retirees/index.html (These states are listed in the first six slides in the slide show)

http://www.statesymbolsusa.org/Wyoming/NicknameWyoming.html

http://www.climate-zone.com/climate/united-states/wyoming/cheyenne/

http://www.brainyquote.com/quotes/authors/w/winston_churchill.html#JXbav5Ajq8l7XLIB.99

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