How China Is Setting Us up
for Inflation and Failure

China is obsessed with keeping its inflation under control and has no fear of raising interest rates each time inflation moves higher. In the U.S., interest rates cannot rise, because the economy is so fragile and the higher rates will substantially increase the U.S. annual budget deficit, as we have so much interest to pay on our national debt. Is there a connection? Cracks in the lining?

Unexpectedly, China increased its bank rate Tuesday for the fourth time since October 2010. The rate increase was undoubtedly done in an effort to cool inflation.

In China, one-year deposits rates are 3.25%. In the U.S., a one-year U.S. Treasury pays 0.29%. Big difference.

China is obsessed with keeping its inflation under control and has no fear of raising interest rates each time inflation moves higher. In the U.S., interest rates cannot rise, because the economy is so fragile and the higher rates will substantially increase the U.S. annual budget deficit, as we have so much interest to pay on our national debt.

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But changes are starting to show in the Fed’s attitude and concern toward inflation.

During a question period after a speech Monday in Stone Mountain, Georgia, Fed Chief Bernanke said, “We have to monitor inflation expectations extremely closely because if my assumptions prove not to be incorrect, then we would certainly have to respond to that and ensure that we maintain price stability.”

In English: the Fed will keep interest rates low, but as soon inflation starts to rise, all bets are off. The Fed will switch from a low-interest-rate policy to a rising-interest-rate policy to fight inflation.

My fellow editor and good friend, Robert Appel, a lawyer-turned-stock-picker, said it best yesterday…

“While the rest of the world watches in horror, China likes to pretend that it is ‘not’ the strongest industrial engine on the planet (it is), and tries to keep its currency undervalued.

“On the other side of the globe, the U.S., addicted to power after a century of having the strongest economy and the strongest currency, wants to pretend that it is the major industrial engine on the planet (no way!) and that its currency deserves to remain the world’s Reserve Currency (something that will change sooner than later).

“Adding to the confusion is the fact that most Western powers (except Germany, which is now carrying the entire E.U. on its back) are in the exact same mess as the U.S.—the result of decades of Central Bank pranks and shenanigans—whereas China stands alone, and that’s exactly how China likes it. Under these circumstances, to have China with high rates and the U.S. with effectively ‘negative’ rates is an invitation to inflation—which is what China is trying to control.”

Now, let me ask you this, my dear reader: Do you sincerely believe that gold has risen from $300.00 an ounce in 2002 to almost $1,500 an ounce today because inflation is not a problem?

(Tomorrow, I will have a special essay on the ridiculous budget crisis being played out in Washington. I want everyone in our PROFIT CONFIDENTIAL community to read it.)

Michael’s Personal Notes:

Speaking of gold…

After hitting another record price high yesterday, all the naysayers are nodding their heads this morning and saying, “Gold is in a price bubble.” As I have been writing for months and years, gold is in a real bull market that will ultimately see the price of the metal rise to $2,500 to $3,000 an ounce or even higher.

Some food for thought:

All the gold bullion existing in the world today is worth considerably less than one percent of all global assets. Less than one percent of all mutual funds own gold-related investments. The amount of money that can come into the gold market (once the “herd mentality” gets going) is overwhelming.

If I were at a dinner party and took a survey at the party of those people who had exposure to gold investments, I’d be lucky to find one out of 20 people there who say they were invested in gold. I believe 95% to 97% of society has no idea of what is going on in the gold market.

The U.S. dollar is collapsing against other world currencies. Inflation (see today’s lead article) is becoming a real problem, so is America’s debt crisis. Instead of promoting gold (real money) as a form of investment to our citizens, our central bankers prefer to keep the printing presses running, issuing funny-looking green paper called “fiat money.” The rise in gold prices is an indication that the fiat paper “thing” is coming to an end.

The Chinese…they are the smart ones. They actually encourage their citizens to own gold.

Large Chinese companies are buying North American precious metal and resource plays like they are going out of style. And we just sit back and let them take ‘em over.

Where the Market Stands; Where it’s Headed:

Up, up and away for stocks? Yes, it’s been that way for months. Euphoria and excitement over the stock market are slowly creeping in. “Dow Rises to Highest Close in 34 Months,” read the headline in The Wall Street Journal yesterday. A major well-known stock market advisor I follow intimately turned bullish yesterday (after being bearish for two years). The number of investment newsletter writers turning bullish is only 10% away from record highs. They will all be proven wrong.

The entire “economic turnaround” scenario is playing out exactly as the bear market wants. I realize I’m one of the few remaining analysts and economists that believe this is a bear market rally, otherwise known as a bear market trap. In fact, this opinion of mine is a rarity in the marketplace today. Time will prove if I am right or wrong.

I continue to believe we are in a bear market rally that started in March 2009. The more people are turning bullish on stocks, the closer the market is getting to a top. The Dow Jones Industrial Average is now at its highest level since June of 2008. The market has been up 10 of the 14 last trading days. The top for this market is not that far away.

What He Said:

The year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.