Inflation is the rise in prices of goods and services in an economy over a certain set time period. When prices rise, for the same level of income, the consumer can purchase less, which means they have less purchasing power and are “poorer” compared to the previous time period. The inflation rate is the annualized level of price changes. Excessive growth of the money supply is one cause of inflation. When the government adds more money to an economy, it devalues each bill already in circulation, lowering the value, as it now will take more money to purchase the same good or service. Inflation is not a problem if it is very low; but, once it escalates, it causes severe economic problems.
According to BlackRock, Inc. (NYSE/BLK), the biggest U.S. money manager by assets, $70.1 billion was funneled into exchange-traded funds (ETFs) in the first quarter of this year. What’s even more surprising is that 93% of all the inflows were in the U.S. equities market funds. (Source: Wall Street Journal, April 2, 2013.)
Morningstar, Inc. (NASDAQ/MORN), an investment research firm, states that 352 mutual funds that are classified as bond funds had exposure to the equities market as of the end of March 2013. This number is up from 312 at the end of 2012 and 283 in the first quarter of 2012. (Source: Wall Street Journal, May 1, 2013.)
Take Loomis Sayles Strategic Income fund, for example. This $15.0-billion fund is shifting its gears toward stocks, as its allocations to the equities market soared from five percent in mid-2011 to more than 19% now. According to the fund, it can allocate up to 35% of its assets into the equities market in preferred stocks and dividend-paying common shares. (Source: Loomis, Sayles & Company, L.P. web site, last accessed May 3, 2013.)
On top of this, and as it has been documented in these pages before, central banks are investing in the equities market, too.
It is no longer a hidden fact: investors, like central banks, and bond funds are rushing toward the equities market, because investment returns elsewhere are very low. These investors are taking a higher risk for an average rate of return.
The Dow Jones Industrial Average rose 11% in the first quarter—the best start to a year since 1998—and the S&P 500 soared 10%.
All … Read More
In its latest meeting minutes, the Federal Reserve said it will continue with quantitative easing, creating $85.0 billion in new money monthly, in order to bring economic growth to the U.S. economy. (Source: Federal Reserve, May 1, 2013.)
The Federal Reserve, once again, didn’t provide any clear indication as to when it will end the quantitative easing; rather, the central bank stated it will continue to do the same “until the outlook for the labor market has improved substantially in context of price stability.” (Source: Ibid.)
The Federal Reserve has already increased its balance sheet to over $3.0 trillion, and if it continues its quantitative easing at this pace, its balance sheet will balloon even more, possibly even reaching $4.0 trillion—or even $5.0 trillion—in a very short period of time.
This is troublesome news, dear reader. The more money created out of thin air via quantitative easing, the more the fundamentals of the reserve currency, the U.S. dollar, deteriorate.
As I have mentioned in these pages before, we only need to look at the Japanese economy to see quantitative easing is not a viable option for us.
The Japanese currency has plummeted since the Bank of Japan revved up its quantitative easing. Just look at the chart below of the Japanese yen compared to other major currencies in the global economy; it seems as if the currency has fallen off a cliff. If we keep up with all this money printing, the U.S. dollar may eventually look the same!
A falling U.S. dollar will drag down the buying power of Americans even further, as they … Read More
As of April 26, more than half of the companies in the S&P 500 issued their corporate earnings for the first quarter of 2013. By no surprise, and as I have been warning in these pages, only 44% of them were able to beat the sales estimated by Wall Street analysts. (Source: FactSet, April 26, 2013.)
Pfizer Inc. (NYSE/PFE), a major drug maker in the S&P 500, reported a nine-percent decline in revenues in the first quarter. But in spite of its decline in sales, this S&P 500 company was able to post a 58% increase in corporate earnings.
One can’t help but wonder how it can be possible to show better corporate earnings on declining sales.
As I have been harping on about in these pages, companies in key stock indices, like the S&P 500, are able to show better-than-expected corporate earnings through a financial engineering technique called stock buybacks. While S&P 500 companies aren’t selling more of their goods or services, of those that have reported their corporate earnings so far this season, a surprising 73% of them were able to beat estimates.
International Business Machines Corporation (NYSE/IBM), a technology giant in the S&P 500, reports that worldwide sales fell for the company in its latest quarter; sales plummeted seven percent in the Asia-Pacific region, its services business saw a decline of four percent, and hardware sales dropped 17% in the first quarter of 2013. (Source: CNN Money, April 18, 2013.)
But International Business Machines (IBM) announced it will buy back an additional $5.0 billion worth of its own shares, in addition to the $6.2-billion share … Read More
For the first time in six years, the U.S. federal government expects to reduce its national debt by $35.0 billion, which is set to happen in the third quarter of its fiscal year (April–June 2013). (Source: Wall Street Journal, April 29, 2013.)
But at the same time that the U.S. Department of the Treasury reported it will pay off this insignificant portion of the national debt, it also said that the government expects to borrow another $233 billion in the last quarter of fiscal year 2013 (July–September 2013).
The Congressional Budget Office (CBO) expects the government will hit a budget deficit of $845 billion by the end of this fiscal year. But at the end of March, the budget deficit of the U.S. federal government had already hit $600 billion. Hence, I’m expecting 2013 to be the fifth consecutive year of trillion-dollar-plus deficits for the U.S. government.
I hate to put it in these words, but like a drunk who thinks he doesn’t have a problem, the problem can’t be solved until it’s realized. The politicians and central banks continue to tell us that the government increasing its budget deficit and the Federal Reserve continuing to print new paper money is leading the U.S. economy towards growth—but is it true?
I beg to ask the question: how long can we continue to borrow at this pace and increase our national debt and consider it all to be sustainable? Can we borrow at this pace five years down the road without making any fundamental changes? I highly doubt it.
Right now, the Federal Reserve is keeping the U.S. government afloat … Read More
In the first quarter of 2013, real personal disposable income (the amount of money the average American has left after paying taxes) in the U.S. economy decreased 5.3% compared to the same period of 2012.
As consumers in the U.S. economy experienced a contraction in their income, their expenses increased. Personal outlays increased 4.1% in the first quarter of 2013 compared to the first quarter of 2012. As a result of contracting income and rising expenses, the personal savings rate compared to disposable income in the U.S. economy was only 2.6% for the first quarter of 2013.
Similarly, private businesses in the U.S. economy are seeing their inventories rise. Businesses increased their stockpiles by $50.3 billion in the first quarter of 2013, $13.3 billion in the fourth quarter of 2012, and $60.3 billion in the third quarter of 2012.
What all of these numbers show is that consumers in the U.S. economy are struggling and businesses are not selling. This phenomenon is further proven by the corporate earnings of companies in the key stock indices; while many are beating their profit targets, only a handful are meeting their revenue expectations.
The U.S. economy is consumer-focused—consumer spending makes up a huge chunk of our gross domestic product (GDP). Consumers in the U.S. economy are in pain. We have wages that are declining, expenses that are rising (thanks to the weakening value of the U.S. dollar and rising inflation due to too many new printed dollars in the system), savings that are falling, and an unemployment rate that remains high.
As I have been saying, real economic growth takes place in a … Read More
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