Rob Arnott says we’re in the worst depression since the Great Depression and the Fed may be making things worse. Arnott, who oversees $80 billion at Research Affiliates, tells King World News:
When real interest rates are 2%-4% and inflation rates are 2%-4% you get a really nice peak where the average P/E ratio is north of 25 times earnings. The interesting thing is both of these numbers are within the control of the Fed, the Fed can control the rate of inflation and tacitly can therefore control the real rate of interest.
Where are we now? We have negative real interest rates. Okay, that’s pretty alarming. We also have inflation rates (if) correctly accounted, it’s probably in the 5%-7% range. If inflation kicks up another 1% or 2%…This creates some fairly serious downside risk for equities if the Fed continues on it’s current path.
Unfortunately I think they will, unfortunately enabling bad behavior is what they do to try to avoid an conomic downturn. Well, the downturn is already here. Absent deficit spending, we’re already mired in the worst depression since the Great Depression.