Looking at 2011, the only asset class in the U.S. that fell in value was residential real estate (the same will happen in 2012). The stock market was up this year; the bond market was up; precious metals’ prices were up in price, too. Oil prices rose aggressively in price in 2011.

As for consumer goods, food prices were up sharply in 2011. So much so, even McDonald’s Corp. (NYSE/MCD) needed to raise prices. Our neighbors to the north, Canada, just announced that their inflation rate rose 2.9% in November from a year ago. Other countries are reporting sharply higher inflation. Buyers of government-issued bond in the Western world are seeing their capital erode, as the inflation rate is higher than the return on the bonds!

During the year, I have written about how the Federal Reserve’s actions of artificially keeping short-term interest rates at zero for five years (the Fed said it would keep interest rates low until 2013) and the $2.0-trillion increase in the money supply are extremely (almost critically) inflationary.

Investors and consumer who believe that interest rates will be kept low indefinitely are in for a rude awakening. Sure, only few believed me in 2005 when I said the U.S. housing market would crash and create havoc for the U.S. economy. And few believed me in 2006 when I said we were entering a recession.

My most important message this year, dear reader, is a warning about higher inflation and higher interest rates coming our way much faster than we expect. And you should prepare yourself for this.

The last time interest rates fell so low for such a prolonged period was 1935 to 1940. Interest rates went up for 40 years after that. It’s the same old story: Each time the economy collapses, interest rates are brought near to zero. Inflation is then created by interest rates being so low and by fiat money printing; interest rates then unexpectedly spike higher. It will be no different this time around, my dear reader.

The rise in interest rates fueled by sharply higher inflation will catch the majority of investors—not including my readers—off guard.

Michael’s Personal Notes:

A tale of two cities…

I was in Manhattan this weekend and have to report to my readers, I’ve never seen it so busy. The city is booming. Walking on 5^th Avenue after 11:00am is difficult because of the sea of people (forget even trying it at about 3:00pm). The most popular restaurants are full (9:30pm first sitting for a good place) and hotels have jacked-up prices as hotel occupancy is high.

The line-up at well-know toy store FOA Swartz at Central Parkstarts around the block. You’ll have to wait a long time to get into the Apple Store next door, as well. Home prices in Manhattan are going through the roof once more. Soho is booming with shoppers walking the streets, hands full of bags from their favorite retail stores.

9/11 and the Great Recession of 2008? No sign of the economic after-affects in New York City. Just getting a cab in this town is a chore.

Last night, I returned from Miami. In what is suppose to be the beginning of the “Season” for heavily traveled vacation destination; hotels are lowering prices to attract customers. Any of the popular restaurants I frequent, no problem getting in, lots of empty tables. The strip plazas and malls, plenty of empty stores. It’s like the Great Recession of 2008 is only starting to end here.

Home prices in the Miami condo market? Still a glut of home foreclosures on the market. Home prices are not rising; great deals can still be had. The further away from the ocean, the better the home prices.

The rude and elementary importance real estate makes in a local economy”

The biggest real estate condo boom the world has ever seen came to a crash in Miami in 2006. The crashing real estate market has severally affected the economy in Miami; home prices are no where near recovering in Miami. In New York City, home prices never crashed; there is nothing to recover from.

The benefits of the Fed’s policy of zero short-term interest rates and an aggressively expanded money supply can easily be seen in New York City. In Miami, crashing home prices have been too severe for the Fed’s extraordinary measures to take any desired affect. (Also see: “Why We Can’t Have a Sustained Economic Recovery.”)

Where the Market Stands; Where it’s Headed:

With six trading days left in the year, the Dow Jones Industrial Average opens this first day of winter up 4.8% for 2011 excluding dividends…about 50% short of last year’s 10.8% stock market gain.

In case you didn’t see the numbers…

The Dow Jones Industrial Average gained 18.8% in 2009, 10.8% in 2010 and 4.8% so far in 2011. It’s not a co-incidence the market’s advance has been declining about 50% per year. It’s simply the sign of an aging bear market rally. (See: “A Few Numbers That Say a Thousand Words About 2012.”)

We continue to trade in a bear market rally that started in March of 2009.

What He Said:

“Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market , the economy and the stock market. There’s no escaping the carnage headed out way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom the peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this former Fed Chief Alan Greenspan was quoted as saying “the worse is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”

Tags: bond market, home prices, inflation, inflation rate, interest rates, new home sales, real estate, stock market, U.S. economy, U.S. housing market