One of the theories making the rounds these days amongst economists is that the efforts of the government to spur the economy by reducing interest rat...
One of the theories making the rounds these days amongst economists is that the efforts of the government to spur the economy by reducing interest rates to zero and by expanding the money supply so quickly will eventually result in rapid inflation.
Warren Buffett,
Marc Faber, and Bill Gross of Pimco are all very concerned about inflation. In fact, Buffett is worried that all the government's efforts to stimulate the economy will bring back the dreaded inflation of the 1970s.
Well, Buffett hasn't exactly been "on the money" these days. His Berkshire Hathaway just had the worst year in its history. Gross' Pimco missed out on the biggest rally in U.S. T-bills in 14 years last year, because he was worried about inflation. As for Faber, what can you say about a guy who has a newsletter called "The Gloom, Boom and Doom Report?"
During "the lost decade" of Japan, that government pumped billions into that economy, reduced interest rates to zero and never got inflation. In fact, they have been in and out of deflation for 20 years.
If we have learned anything over the past 24 months it is this: anything can happen. My concern is not about inflation, as much as it is about higher interest rates.
We hear and see ads every day from mortgage brokers and financial institutions for consumers to refinance and move into variable rate loans, because interest rates are so low. Maybe you've heard or seen the commercials: "If you have good credit, move out of fixed rate loans into variable rate loans, because the cost to break your fixed loan will be recouped from the cheap variable rate loan."
What consumers are not being told is that the debt of the U.S. government -- in the multi-trillions and now growing annually by trillions instead of by billions -- will eventually place immense pressure on the U.S. dollar. To attract foreigners to buy our debt and fund our deficits, the U.S., I believe, will eventually need to raise interest rates to maintain the value of the U.S. dollar.
Japan did not have this problem, because Japan's currency was not the reserve currency of the world. The U.S. dollar is the reserve currency of 70% of world central banks. How long will central banks want to have a reserve currency based on a debtor nation? If we remember correctly, the U.S. was a creditor nation when most central banks adopted the U.S. dollar as their reserve currency, not a debtor nation like it is today.
Higher inflation...an increasing risk. Higher interest rates because of a weakening U.S. dollar...only a matter of time.
** Michael's Personal Notes:
How are the travel companies possibly making money these days? When I say travel, I'm talking the airlines, hotels/resorts, cruise lines, etc. It is March break in a couple of weeks and I've never seen such deals. Less than $400.00 gets you a flight and three nights' stay in a well-known Las Vegas resort. Or, for that same $400.00, you can get a decent cabin on a cruise ship for a week. A friend of mine who lives in Florida told me it's now cheaper to live on the cruise line than to live in your own home. Is it any wonder the Dow Jones Travel & Leisure Index is down 57% from its high? The problem with all these great deals is that consumers get used to them -- and then demand them in the future. The president of a large high-end women's fashion chain told me yesterday that his customers will not come unless he has his 70% off sale. Are "regular" non-sales prices ever coming back or was Sam Walton a greater genius than initially thought?
** Where the Market Stands:
News this morning is that stocks have hit bottom and that yesterday's massive six-percent rally was the turning point for stocks. Rubbish. One day of trading does not make a new trend. We need to be patient and analyze where stocks go from here. Hard-core, old-time market watchers will tell you that bull markets end in sheer overvaluation, bear markets end in sheer undervaluation. In this bear market, we haven't reached great bargains yet. The S&P 500, at 14 times earnings, is hardly a deal. More than likely, after moving to a severely oversold condition, yesterday we finally got the natural rally that follows severe oversold markets. Hopefully, there's a little more life in this rally before the bear comes out again. So far in 2009, the Dow Jones Industrial Average is down 21%.
** What He Said:
"Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that's why the stock can go higher -- because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher." Michael Lombardi, PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November, 2007. Michael's message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.
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