Posts Tagged ‘inflation rate’
My colleague Robert Appel (BA, BBL, LLB) issued a research paper to the subscribers of one of his financial advisories earlier this week. I thought it important that all my readers be aware of and understand the crux of what Robert is saying about our current economic situation and where it will eventually lead.
Here it is:
“The actions of the Federal Reserve (how far they went to ‘stabilize’ the economy) after the Credit Crisis of 2008 is unprecedented in American history. Of course, I’m talking about the Federal Reserve printing nearly $4.0 trillion in new U.S. dollars while keeping interest rates artificially low for almost six years now.
These actions have caused an ‘era of financial insanity’ that penalizes seniors, savers, and prudent investors, while rewarding borrowers, those who leverage, and risk-takers.
It encourages public companies to doctor their own bottom lines by borrowing money (at cheap interest rates) to repurchase their own shares. This reduces the denominator of their earnings numbers—giving only the illusion of prosperity—and also reduces share float, thereby putting upward pressure on stock prices since more money is suddenly chasing fewer shares.
Articles have appeared in several well-known financial publications, with sources, citing central banks around the world have injected $29.0 trillion into equity markets because they themselves simply could not manage a return at the very same rates they were inflicting on others!
The prime beneficiaries of these insane monetary policies are the banks themselves and the government itself. Because low interest rates allow Washington (and other, similar, fiat regimes) to manage debt payments that could not otherwise be managed in a ‘normal’ interest … Read More
The Bureau of Labor Statistics (BLS) reports inflation in the U.S. economy increased by 0.1% in February from the previous month. (Source: Bureau of Labor Statistics, March 18, 2014.) As usual, these numbers have again brought up the theory of deflation—a period when general prices decline.
Reasons for the deflation fear? In 2013, inflation for the entire year was 1.5%. In 2012, it was 1.9%. Going back further, in 2011, it was three percent. If we extrapolate the inflation numbers from January and February of this year and assume the increase will be the same (0.1%) throughout the year, we are looking at an inflation rate of 1.2% for 2014.
Wells Fargo Securities LLC has gone one step further. Economists at the firm believe there’s a 66% chance that deflation in the U.S. economy will prevail and these chances have been increasing since 2010. (Source: Bloomberg, February 21, 2014.)
To me, this is sheer nonsense!
The reality of the matter is that the inflation numbers reported by the BLS exclude changes in food and energy prices—the most important things consumers use on a daily basis. When you include food and energy, inflation is running at a much higher rate.
The prices of basic commodities are skyrocketing. Take corn prices, for example: since the beginning of the year, corn prices are up more than 15%. Wheat prices are up almost 20% year-to-date. When you look at meat prices, such as lean hogs, you will see they have increased by more than 45% since January.
As I see it, deflation is nothing but a farfetched idea for the U.S. economy. (In a … Read More
Following a weak second quarter, the Dow Jones Industrial and S&P 500 indices are now in positive territory for the first time since the end of the first quarter on the backs of a positive July and August.
So far, August has proven strong for technology, growth, and small-cap stocks, with the NASDAQ and Russell 2000 up 4.2% and 3.4%, respectively, as of the close of Thursday. The S&P 500 is holding at 1,400, a level that I believe will be tough to hold. Every time I look at the long-term technical picture of the S&P 500, I’m concerned about the vulnerability. Since 2000, there have been two major tops at above 1,400, and the current bull market rally from March 2009 appears to be heading for a third top.
What I continue to see is an expectation-driven buying based on a best case scenario that includes a third round of quantitative easing (QE3) from the Federal Reserve, the saving of the eurozone, and strengthening in the U.S. economy. And then you have the uncertainty of the upcoming presidential election.
Yet the reality is that Europe remains in a financial mess, with six eurozone countries in a recession and straddled with major debt and growth issues. Britain is also in a recession. Germany, the largest and strongest economy in the eurozone, is showing positive signs, but the problem will be the country’s focus and distraction in helping to save the eurozone. German Chancellor Merkel appears to be backing the desire of European Central Bank (ECB) to keep the eurozone together, but so far, we have yet to see any concrete … Read More
The stock market is behaving extremely well considering the huge amount of investment risk in the global marketplace. There is, however, no other place for investors to put their money and be able to generate income (dividends) that beats the inflation rate. All assets are risky: real estate, gold, the stock market and even cash. Investor sentiment is all over the map these days and it’s the new reality in a slow growth environment.
I wrote previously about the Federal Reserve’s potential for new policy action, and while it’s total guesswork, I repeat my view that some new monetary policy action would not be a surprise. (See The Stock Market and Investor Sentiment Tank—QE3 Anyone?) It is an election year and the economic news of late hasn’t been inspiring. I think the stock market is now betting on this, and this speculation is contributing to stronger spot prices for gold.
The price of gold is looking really good in my view, and I think it won’t be long before we break $1,700 an ounce. I’ve been looking at a lot of gold stocks lately, and the stock market has come back to this speculative sector. Trading action in many small- and mid-tier gold stocks has been robust over the last couple of weeks.
With the same fervor that gold stocks have had going up, oil stocks have hit hard with the spot price below $85.00 a barrel. That’s the thing you always have to deal with when you’re speculating in resource stocks; you have the operational business risk and the commodity price risk. Even if business is booming at … Read More
Two decades ago, everyone was making money from the stock market. There was a boom, and some of the best stocks were in the technology sector, mostly due to the proliferation of the Internet. You didn’t even need to own the best stocks; just owning the index was a profitable investment strategy. Then, the best stocks and the rest of the market came apart, because valuations got too extreme for the amount of earnings being generated. Many companies in the technology sector are still today recovering from the stock market bubble that burst.
Take Intel Corporation (NASDAQ/INTC), for example. This company is still growing its revenues and earnings, but what used to be one of the market’s best stocks turned out to be a big dud. The company’s stock price hasn’t done anything for years. In fact, Intel’s stock market price on a split-adjusted basis is the same now as it was in November 1998. That’s 13 1/2 years of dividend payments, but no bankable capital appreciation for long-term holders of the shares.
Another company with a similar story is Cisco Systems, Inc. (NASDAQ/CSCO), which is now trading at the same split-adjusted price as in October 2008. Even if the company’s dividend payments covered the inflation rate, if you still owned the stock from that time, you wouldn’t have made a dime.
The notion that long-term investing in the stock market is the only way to go is a total bust as far as I’m concerned. Long-term investing works—but only if you own the right businesses at the right time during the business cycle. Things happen; industries change and … Read More
For some time I have been saying that those people who were prudent, who worked hard all their lives and saved their money, are being punished by historically low interest rates, which are below the inflation rate.
Clearly, artificially low interest rates below the inflation rate help those who are in debt, including the U.S. government, because their interest costs are greatly reduced.
Savers include those retirees who saved prudently all their lives and are now relying on interest income from their savings to help fund their retirement. Savers can also be those of working age who have reasonable amounts of debt, so that they are capable of saving money for retirement or for a large purchase. They, too, are depending on the interest earned on their savings to help finance their retirement or a large purchase.
The problem is that, with interest rates at historic lows, savers who do not want risk and who invest in bank CDs or GICs are earning next to nothing on their savings. To compound the problem, savers are earning interest that is below the inflation rate, which not only wipes out the little interest they earn, but also eats into their savings, because their savings have not kept up with the inflation rate. How can the U.S. experience an economic recovery in such an environment?
A recent study by Haver Analytics and money manager Gluskin Sheff have estimated that, since 2008, savers in the U.S. economy have lost over $1.0 trillion in interest income during the economic recovery. This study takes the difference between the low interest rates of the last few … Read More
While the U.S. economy is apparently improving (at least that’s what the media has been telling us), there are more municipalities defaulting on bond payments and facing widening budget deficits.
Moody’s Investors Services just released a study on the municipal bond market that showed that, for all of the municipal bonds it covers, there were only 71 bond defaults between 1970 and 2009. Moody’s rates over 17,000 municipal bonds.
The world has changed since the financial crisis hit in 2008. The pressure has been on the municipalities and their widening budget deficits since 2008, because the cities and states no longer have the revenue to cover their expenses.
From 1970-2009, Moody’s cited 2.7 annual municipal bond defaults per year on average. In 2010 and 2011, there were 5.5 average annual defaults per year—a more than 100% increase in the annual rate of municipal bond defaults. Clearly, there is a shift here in the wrong direction. Of course, no sooner does Moody’s release these results than we hear of more budget deficit trouble with municipalities.
Harrisburg, Pennsylvania, is back in the news saying that, for the first time in its history, it will default on its municipal bond payments today, March 15, 2012.
In 2009, when Harrisburg first got into trouble, it was able to lease municipal land to the state to receive the funds to cover its municipal bond payments. In 2010, the state simply sent aid over to meet the city’s debt service obligations.
Thank you to the thousands of our readers who participated in last week’s inflation survey. Here are the results with my comments.
On the first question, as to which index best reflected the inflation rate in this country, the Everyday Price Index at eight or the Consumer Price Index (CPI) at 3.1%, 94% of our readers believe that eight percent is better reflection of the true inflation rate in America:
This is a landslide victory for the Everyday Price Index. This result was further confirmed by the second question in which I asked what the true inflation rate is in this country.
The winner of the true inflation rate by a wide margin was 10%. The great majority of Profit Confidential readers believe that inflation is running at 10% per annum.
Of course, not everyone who responded to the survey left comments, but I can tell you that, out of the hundreds of comments that were left, less than one percent of readers believe that inflation is NOT a problem. Everyone was very, very worried that the inflation rate was worsening.
Below are survey respondent comments that reflected what the majority had to say:
“Yes, we’re worried about inflation big time. Although our house is losing value, we still need to pay for the fixed amount on our mortgage. Without wage inflation, the inflation rate (food, gas, child care) in everyday items really eats up our budget. We’re worried we can’t even save for retirement if the inflation rate keeps up at this pace, no matter how we try to save money.”
“I’m on a fixed income and unfortunately, the … Read More
Profit Confidential — IT'S FREE!
"A Golden Opportunity for Stock Market Investors"