Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

After All the Money Printing: How Things Will Look Two Years Out

Wednesday, December 19th, 2012
By for Profit Confidential

On December 12, 2012, the Federal Reserve announced further quantitative easing. Aside from its $40.0-billion-a-month mortgaged-backed securities program, starting in January, it will buy $45.0 billion a month in U.S. Treasury securities. Why? “…to support a stronger economic recovery,” according to the central bank. (Source: Federal Reserve, December 12, 2012.)

While announcing more quantitative easing in the U.S. economy, our central bank also promised that it will continue to keep interest rates artificially low (near zero) until the unemployment rate reaches 6.5%. Its projection for inflation for two years out is 2.5% per annum.

The creation of new money and keeping interest rates artificially low isn’t anything new. This has been happening in the U.S. economy since 2008, but there are no specific dates for when the “money printing” will end. Hence, I get the impression that quantitative easing may go on for a long, long time!

The U.S. unemployment rate in November stood at 7.7%. (Source: Bureau of Labor Statistics, December 13, 2012.) This means that if the Fed desires an unemployment rate in the U.S. economy of 6.5% before it stops printing new money, the unemployment rate has to decline by 15.5%.

Looking back at recent unemployment rate numbers, if the rate of decline stays the same as in recent history, it will take roughly 15 months for the U.S. unemployment rate to reach 6.5%—if there are no hiccups in the economy.

Inflation, according to the consumer price index (CPI), is running at 2.2%. (Source: Bureau of Labor Statistics, November 15, 2012.) Unfortunately, as we have established in these pages, the current CPI calculation doesn’t capture the real inflation rate that U.S. consumers experience. The real inflation rate, if I had to estimate, is above five percent per annum.

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And if the Fed prints for another 15 months, at $85.0 billion a month, the Federal Reserve will create $1.275 trillion in money out of thin air. Inflation rising at a real rate of five percent, while the Fed prints another $1.275 trillion in paper money, is a real problem. Rising inflation and more money in the system, as we have already experienced, results in a decline in purchasing power!

So let’s look two years out. Two years from now, the U.S. unemployment rate falls to 6.5%. At the same time, the balance sheet of the Federal Reserve has mushroomed to $4.0 trillion. Under such a scenario, I see real inflation being a real problem. As inflation rises, gold bullion prices will rise; as inflation rises, the buying power of the U.S. dollar declines; as inflation rises, interest rates rise.

Our economy can’t handle higher interest rates; our housing market cannot handle higher interest rates—even two years out. At this point, you can see why I am more pessimistic than optimistic about the future.

Where the Market Stands; Where It’s Headed:

Enjoy the traditional Christmas rally, dear reader. It won’t last. I see many signs that 2013 will be a challenging year for the U.S. economy, a challenging year for the stock market. In fact, I believe 2013 will be a major reversal year for the market.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Back in January 2002, I personally started buying gold shares.” Michael Lombardi in Profit Confidential, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

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Michael Lombardi - Economist, Financial AdvisorMichael 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. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. 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 or Add Michael Lombardi to your Google+ circles