“U.S. inflation rises by most since March,” flashed the headlines across the newswire last Thursday. Turns out, consumer prices in America are rising at an annual rate of 3.6%—sharply higher than the Federal Reserve’s “target rate.”

Hold on a minute. Didn’t the Fed say last week that it will keep short-term interest rates near zero until at least mid-2013? How can they keep interest rates low and fight rising inflation?

Here’s the worst-kept secret amongst us economists…

We want inflation. We want fast, sharp inflation. Why? Because if inflation returns, real estate market prices will rise in value and so will the stock market. When the assets consumers own are rising in value, they feel better about things, their confidence turns positive, and they start spending more.

Dealing with inflation is much easier than dealing with deflation. To tame inflation, the Fed raises interest rates. What does it do to fight deflation? Drop money from helicopters?

According to Barlow Research Associates, 53% of U.S. retailers with annual sales in the $10.0 million to $500 million range have lifted the prices they charge consumers over the past 12 months. Retailers are passing their higher costs to consumers.

We need inflation desperately. And the Fed, I believe, is doing everything in its power to get significant inflation going in this country. Just imagine if housing was rising in value, if your investments were rising in value once again, if real interest rates started to rise without affecting the economy.

If we do not get inflation going in this country soon, we could fall into deflation and follow Japan’s “lost decade,” a 10-year period where prices went down and the economy contracted.

All that money the Fed has been printing for months…those pressmen working overtime…maybe not a bad idea after all.

Michael’s Personal Notes:

I read a Bloomberg story (8/17/11) that said President Obama will deliver a speech after Labor Day weekend to the American people, whereby he will announce that he will be asking Congress for fresh money and more long-term cuts to the U.S. deficit. The story left me totally confused.

The way I read it…

Obama will ask Congress for billions in new dollars to boost the economy. He wants to cut taxes and increase infrastructure spending. The story then said the President will also ask Congress for more than the original $1.5 trillion in proposed long-term U.S. deficit cuts.

I don’t understand it. How can you increase spending to boost the economy, lower taxes, and reduce the deficit all at the same time? But then again, I’m not a politician.

Where the Market Stands; Where it’s Headed:

Some facts for my readers…

Last week, the S&P 500 capped off its biggest four-week loss since March of 2009. We all know what happened after March 2009; stocks went up 100%.

The S&P 500 closed last week at a price/earnings multiple of 12.2, the lowest since March of 2009. We all know what happened after March 2009, stocks went up 100%.

Bets by investors in hedge funds that bet against the stock market are now at their highest level since July 2009.

Dear reader, I am long-term bearish on America. Yes, I believe we have yet to see the worst of the bear market that started in late 2007. But the environment today is one of extreme negativity, extreme bearishness. Stocks do not traditionally go in the direction people think they are headed.

Over 90% of investors were scared out of their wits in March of 2009—and stocks went the other way. There is too much consensus on the stock market having thrown in the towel for 2011. Name me one analyst claiming the Dow Jones will surpass its May 2, 2011, high of 12,876. There are none.

The bear market rally that started in March of 2009 remains intact. I believe we will see higher stock prices again before the markets test their March 2009 lows.

What He Said:

“The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of bringing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate market bust would create havoc with the banking system.

Tags: bear market, Bear Market Rally, deflation, inflation, interest rates, real estate market, S&P 500, stock market, Stock market watch, U.S. Deficit