This morning comes the news that the European Central Bank (ECB) has just cut interest rates again (for the second straight month) to one percent—the lowest level on record for the ECB.
There is immense pressure on European leaders and the International Monetary Fund to bail out the troubled eurozone countries. The easiest way to bail them out is to issue more euros, something Germany has been steadfastly against. Increasing the money supply has been one of the Federal Reserve’s tools to stimulate growth in the U.S. during the recession.
Why is Germany so against printing more money? After World War I, Germany experienced a nasty bout of hyperinflation that crippled the country…and the memory of this period lingers in the minds of many German politicians.
Policies of interest rates kept artificially low and increasing the money supply, I believe, are the items and actions responsible for the 500% increase in the price of gold bullion we have witnessed over the past 10 years. Gold bullion prices are screaming, “Inflation ahead!” (See: Top Five Reasons Why Gold Bullion Prices Will Move Even Higher.)
Unfortunately, reducing interest rates and increasing the supply of money in the system are the only two tools our governments and central bankers can resort to. Debt is rampant, so why not add more to it? This seems to be the attitude, especially in an environment of low interest rates.
Economics 101 tells us that, when there is too much supply of an item (such as fiat money), the value drops. In the case of fiat money, be it the euro or the dollar, the more they print of it, the less it’s actually worth, and the more euros and/or dollars it will cost to buy an item as time passes. This is how we get rapid inflation.
Mark my words: we will pay dearly for the artificially low interest rates of today and the significant increase in the money supply we have experienced in America. So far, the eurozone has only kept interest rates artificially low. If the ECB starts printing more money to resolve its crisis, rapid inflation will become a worldwide phenomenon, not a problem restricted to America. (Also see: Economic Analysis: And Then Came Rapid Inflation.)
Michael’s Personal Notes:
This morning, the world’s largest restaurant chain, McDonald’s Corp. (NYSE/MCD), reported that stores open at least one year in November saw sales rise 6.5% in the U.S. McDonald’s, with over 33,000 stores worldwide, is often referred to as a benchmark stock; a leading indicator of consumer spending behavior.
As a leading indicator, McDonald’s 6.5% year-over-year U.S. sales increase tells me two things:
The low-end consumer market is spending and the middle-end consumer is curbing expenses and turning to low-priced food alternatives such as McDonald’s. The results of many retail companies, again all leading indicators of consumer spending, are telling us the same story.
Look at the post-recession environment and you will find that the high-end retail sales market is doing well and the low-end retail sales market is doing well. The middle-market, the average Joe American, is the one who has been experiencing the most post-recession pain.
Nearly 15% of the U.S. population is using some form of food stamps; that’s 45.8 million people (Source: Wall Street Journal, 11/1/11). When you hear such a statistic, it’s easy to see why McDonald’s business is doing so well. In 2003 McDonald’s stock sold at close to $10.00 a share. This morning, it opens at $96.45—a leading indicator of more profits lying ahead.
We need to keep in mind that raw food prices have been skyrocketing. McDonald’s has been raising its prices to consumers as McDonald’s cost of goods has risen. Hence, as a leading indicator, McDonald’s results signify that, as food costs rise, consumers are turning more and more to low-end restaurants like McDonald’s.
I believe that 2012 will be another very difficult year for the U.S. consumer. Companies like McDonald’s that cater to the low-end retail market, while increasing the nutritional value of their product, will continue to perform well.
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average opens this morning up about eight percent for 2011 inclusive of dividends. Almost every day that passes, the stock market sneaks in a small gain. In fact, over the past eight trading days, the market has only had one major down day.
We are in a bear market rally in stocks that started in March of 2009. This bear market rally, phase II of secular bear market, can last between three and four years. So far it has lasted 32 months. The purpose of a bear market rally is to lure investors back into the stock market.
What He Said:
“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict aU.S. recession, long before Wall Street analysts and economists even thought it a possibility.