Inflation and Rising Interest Rates:
America’s Newest Imports

Recent developments are placing tremendous pressure on European countries to raise interest rates. The spillover will result in higher rates here. Recent developments are placing tremendous pressure on European countries to raise interest rates. The spillover will result in higher rates here. Here’s what my readers should know:

Unemployment in Germany fell to an 18-year low in January, as boom times are back at the world’s second largest exporting country. This smells of rising interest rates.

Inflation in the 17 countries that use the euro (known as the Euro Zone countries) rose at an annual rate of 2.4% in January. European Central Bank (ECB) president Jean-Claude Trichet has publicly stated that inflation must be kept in check in Europe (ECB’s target inflation rate is two percent). Higher interest rates in the air here, too.

London-based National Institute of Economic and Social Research said on Tuesday that the Bank of England will likely raise interest rates three times in 2011 to fight inflation.

Sure, there are those who say that European countries need to raise interest rates to support the fragile euro, but I don’t see this as a conspiracy to support the euro. The United Kingdom never adopted the euro, interest rates pressures are also mounting in China and Japan, and world food prices are rising rapidly (with sugar prices at a new 30-year high this morning).

While it may be in the best interest of the United States to keep interest rates low compared to the rest of the world in an “off the books” greenback devaluation play, my readers need to keep know about these two important facts:

In a letter to the Financial Crisis Inquiry Commission from Fed Chairman Ben Bernanke dated December 21, 2010, Bernanke says that the Fed failed in 2005 to see the risks in the housing market. Do you think the Fed will hesitate to raise interest rates if the Dow Jones Industrials hit 13,000 or 14,000 in an effort to fend off another stock market bubble? I think it will.

Finally, the chart of the bellwether 10-year U.S. Treasury shows that a base has been forming at the 3.4% level since mid-December to today. I believe that base will act as the foundation for a move by the 10-year Treasury to its next stop of four percent. The yield of the 10-year Treasury is up 41% since October 2010 and keeps pushing higher.

Welcome to America’s latest imports, inflation and higher interest rates.

Michael’s Personal Notes:

Optimism on the U.S. economy is getting a little ahead of itself and this is reason for concern for me.

According to the National Association for Business Economics in Washington, U.S. companies’ employment outlook is at a new 12-year high. American businesses are planning to aggressively increase their payrolls over the next six months.

In a poll of 1,000 qualified investors conducted by Bloomberg over January 20 to 24 of this year, it was found that global investors are targeting the U.S. as “one of the best places to put their funds as they grow increasingly confident in the economic outlook.”

I’m a contrarian at heart. I like to buy stocks when everyone is worried about the economy and selling stocks (2008, 2009). Once I see investors and analysts starting to turn so bullish, I start to get worried and actually start to think in the opposite direction—things are not as rosy as they seem.

(The same Bloomberg poll noted above also asked investors about gold. More than half asked said that the gold market is in a bubble. This is music to the ears of a gold bug like me.)

Where the Market Stands; Where it’s Headed:

On this site on January 28, 2011, I wrote, “When will we get that (Dow Jones Industrial Average) close around 12,000? Soon, dear reader, soon.” That “soon” happened yesterday, with Dow Jones Industrials plowing through to 12,040. The world’s most followed stock market index opens this morning up 3.9% for 2011.

Since December, I have said that, in the immediate term, stocks would move higher. I have no reason to change that opinion. There is tremendous pressure on stocks to rise: Corporate earnings are strong, there is a lot of money on the sidelines to enter the market and move it higher, and now the stock market is being viewed as a safe haven against the U.S. dollar (how quickly we forget 2008).

But all good things come to an end. The short- and long-term outlooks are exactly the opposite of the immediate term: Too many bullish investors, rising inflation, rising national debt, a devaluation of the greenback and rising interest rates—a lethal combination for the market. Enjoy the rally while it lasts!

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.