View from the Observation Deck

1. The last time the Federal Reserve tightened monetary policy was from June 2004 through June 2006. It raised the federal funds target rate from 1.00% to 5.25%.
2. Ironically, interest rates actually began to rise a year before the Fed began its tightening phase.
3. The markets were already beginning to factor in the potential for higher interest rates and inflation. Why? The annualized GDP growth rate rose from 1.7% in Q1'03 to 3.4% in Q2'03 to 6.7% in Q3'03.
4. The yield on the 10-Yr. T-Note rose from 3.52% on 6/30/03 to 5.14% on 6/30/06. The Consumer Price Index-Headline rate rose from 2.1% in June 2003 to 4.3% in June 2006, according to the Bureau of Labor Statistics.
5. In our opinion, investors should get prepared for the day that interest rates and/or inflation begins to ascend. Investors should want to know which asset classes might thrive in that type of climate.
6. Looking at the asset classes featured in the chart it becomes apparent quickly that investors may need to accept some additional risk in order for the opportunity to prosper.
7. Not only is there a tremendous amount of stimulus capital already in the system waiting to be put to work, the Fed continues to hint it is prepared to launch a third round of quantitative easing if warranted.