The Real Threat to the Economy
Wednesday, November 15th, 2006
By Michael Lombardi, MBA for Profit Confidential
U.S. retail sales are falling, the producer price index is crashing, housing prices are falling… and no one’s talking about deflation but me.
The U.S. Labor Department reported yesterday the Producer Price Index fell 1.6% in October, the biggest monthly drop on record (and following a 1.3% drop in the CPI in September)! The same report said retail sales in the U.S. dropped in October as well.
Investor focus on the Federal Reserve now seems to be “when will interest rates start to fall?” While most analysts expect the Fed to lower the rates before May of next year, they’re missing the fundamental problem. And that problem is the continuing threat of deflation.
Several months ago I predicted the U.S. Fed would soon start to lower rates. This is old news. The economy and consumer spending are both slowing fast, hence it’s a given the Fed will lower rates soon to stimulate spending.
The real problem, the one no analysts seem to be talking about, is deflation. Fed governors are still talking about inflation–they’ve got it wrong. Only precious metals and stocks are maintaining their price levels, everything else seems to be in price decline. There’s no need for me to get into the dangers of deflation as I’ve written about them before. Let’s just put it this way: Deflation is about the worst economic state a country will experience.
It’s no secret the money supply has been expanding quickly so the Fed ensures there is enough cash in the system to stimulate growth and spending. How will the Fed deal with deflation? Will it drop rates down to a 50-year low again? And if rates do fall aggressively, will consumers spend in an environment where prices are falling? It didn’t happen in Japan during their 10 year period of deflation.
The risks to the U.S. economy in 2007 are greater than I’ve seen in years. I hope my readers are reviewing and preparing their portfolios for the bumpy economic times ahead.
NEWSFLASH–Chinese billionaire Larry Yung has purchased a significant stake in miner Anglo American at a cost of $800 million. The Chinese are making major investments in natural resources and commodities. People like Larry Yung are smart investors–putting their money where they believe others will soon follow. Gold could be a very valuable commodity in the face of a weaker U.S. Dollar.
Next Post: What’s to Warm Us Up During the Long Canadian Winter?Previous Post: Chinese Stock to Follow
Tags: gold, interest rates, stock market, U.S. economy
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
