I’ve been writing in PROFIT CONFIDENTIAL about how the easy monetary policies of the U.S.—specifically a historically prolonged period of low-interest rates and an expanding money supply, as evidenced by the Fed buying U.S. Treasuries—would ultimately lead to inflation.
Governments in Europe, including non-euro currency members such as the U.K., have been experiencing rising inflation. Yesterday, we learned that our neighbour to the north, Canada, a G7 country, has reported sharply higher inflation.
In May, the inflation rate in Canada rose to 3.7%, its highest level in eight years. Significantly, consumer prices in Canada rose by 0.7% in one month, from April to May. The unexpected sharp rise in Canada’s May inflation numbers will put pressure on the Bank of Canada to raise interest rates again.
So, how about here in the U.S.; when will inflation become a problem here? I look at two items to gauge inflation risk, and both are flashing red right now.
I look at the price of gold bullion, and it’s continuing to rise, telling me that inflation lies ahead (the rise in gold prices also tells a tale of a lower-priced U.S. dollar ahead). Secondly, I look at the yield of long-term government bonds.
Yesterday, 10-year U.S. Treasuries completed their biggest three-day drop since November of 2010—ending at a yield of 3.12%. Sure, the popular media will tell us that the yield on long-term U.S. Treasuries is rising, as Greece has succeeded in its austerity measures and will not be going bankrupt, hence investors are no longer flocking to the security of U.S. long-term bonds. Personally, I don’t buy that reasoning. I see the recent sharp rise in the yield of the 10-year U.S. Treasury as a leading indicator of a devaluing greenback, concern over rising U.S. debt and of course, inflation.
Michael’s Personal Notes:
How to lose $545 million in six years…
News Corporation (NASDAQ/NWSA) bought web site MySpace for $580 million in 2005. Yesterday, it announced that it was selling MySpace for $35.0 million—mostly in stock.
What happened? MySpace customers have left the web site for other social networks, like Facebook.
While News Corporation is losing half a billion on MySpace, LivingSocial, the second largest coupon web site, is getting ready to raise $1.0 billion in its initial public offering.
Groupon, eBay, Amazon, Google, LinkedIn, and maybe one day Facebook are stock market darlings, as all these companies brought something to the Internet that was different than anyone else. All of these had revenue; all but LinkedIn had real profits.
And this is something we have been preaching to our subscribers in our paid investment newsletters. When looking at an Internet-related stock, look for a company that has a service that no other company offers; look for the leader in its space. Focus on companies with real revenues and real profits. Stay away from companies that just have ideas. News Corporation paid hard cash to learn this lesson.
Where the Market Stands; Where it’s Headed:
Yesterday, the S&P 500 capped off its biggest three-day gain since March. I’ve been telling my readers that the market sell-off was overdone, that stocks would come back, and they have.
The S&P 500 has gained 3.1% so far this week. The Dow Jones Industrial Average is up 5.9% for 2011.
A bear market rally in stocks that started in March of 2009 continues to preside.
What He Said:
“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation, as I’ve written about them (many times) before. Let’s just put it this way: Deflation is about the worst economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in PROFIT CONFIDENTIAL, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.