Tame Inflation Is Great News For Penny Stocks

| February 9, 2012 | 0 Comments

I have a confession to make.  I’m a huge fan of monetary policy.

It’s true.  As a student of macroeconomic policy, I get really excited about the ins and outs of central banking and the implementation of monetary policy.

You see, if monetary policy is done correctly, it can have a significant, positive impact on the economy.  And it can all happen without having to pass through the Hall of Jokers we call Congress.

Here’s the thing…

For monetary policy nerds like myself, the past couple years have been a golden age.  Stuff that we’ve only read about in textbooks is actually happening… and on a massive scale. 

These days we can actually measure the results of certain theories that, until now, were nothing more than ideas.

For instance, one important economic textbook theory is that accommodative monetary policies won’t cause hyperinflation in a depressed economy.  Let me put that in plain English – easy-money policies such as the Fed’s QE programs aren’t risky as long as unemployment remains high.

And you know what?  Turns out this theory is entirely true.

According to Bloomberg, the personal-consumption-expenditures price index (a direct gauge of inflation) rose just 2.4% for all of 2011.  Keep in mind, the Fed’s stated inflation target is 2%.

In other words, in terms of inflation, the economy is right where it needs to be.

So why’s that important to us?

Because it’s a great sign for penny stocks.

You see, if investors aren’t worried about skyrocketing inflation, they’ll be more likely to take risks.  Usually, more risk-taking means more money flowing into penny stocks.

Okay, back to inflation. 

We know inflation is tame for now… but what happens when the economy really starts gaining steam?  Didn’t the most recent jobs report blow away expectations?

As a matter of fact, the January jobs report was really good.  But, we still have a long way to go to reach full employment.  And, the Fed will have plenty of time before that happens to prepare.

Remember, the Fed has a strong history of combating inflation.  It’s deflation that Fed officials are really worried about.

Moreover, if the economy is improving so fast that we have to worry about inflation, than business must be good.  And that’s also a great thing for penny stocks.

The way I see it, penny stock investors are in a win-win situation.  And, as I’ve said in the past, that’s the best place to be.

Yours in profit,

Gordon Lewis

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Category: Investing in Penny Stocks, Penny Stock Tips

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