The Peril of Lower Prices
Wednesday, August 16th, 2006
By Michael Lombardi, MBA for Profit Confidential
Yesterday, the U.S. Labor Department reported the core rate for Producer Prices fell “unexpectedly” last month by 0.3%. This report obviously caught analysts and economists off guard.
I’ve been writing for months about how the U.S. Fed should be more concerned with deflation than inflation. Yesterday’s news provides ammunition to my view. Sure stocks and bonds rallied yesterday because lack of inflation means interest rates in the U.S. will not rise again at the next Fed meeting. But long-term, stocks will be faced with immense selling pressure if prices continue to fall (deflation).
New cars, computers and men’s clothing led producer prices lower last month. To this, I’d also like to add housing as a deflating factor. In most markets in the U.S., especially the once hot real estate pockets, house prices are easing.
The peril of lower prices is simply this: What you’ve borrowed money to buy (such as a house) falls in value, while the debt you’ve accumulated to buy the item does not fall in value. Deflation is about the worst possible scenario for the U.S. economy.
And, under a deflationary environment, the U.S. dollar would come under immense selling pressure by foreigners. American investors should be looking for investments that benefit from a lower valued U.S. dollar. Ideally, the stocks of American companies that sell their products predominately outside the U.S. could be attractive.
In the event deflation rears its ugly head, U.S. Federal Reserve Chairman Bernanke will need to flood the proverbial “gates” with liquidity. He’s to do this by aggressively lowering rates and increasing the money supply. Maybe the Fed sensed some deflation earlier this month when it decided not to continue its campaign of higher interest rates.
As economic data is released, I’ll keep you posted on the depth of the deflationary situation for the U.S. and what it could mean for investors like us.
Next Post: Guess Who’s Counting the Mortgage and Real Estate “Beans?”Previous Post: Policy Change Could Impact the Little Guy
Tags: federal reserve, inflation, interest rates, real estate market, U.S. dollar, 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
