There’s plenty to say about the economy and the stock market this morning…my opinions on both can be found below. But right now I want to talk about something the media and analysts have not been focusing on, something I believe will eventually come to bite us hard in North America.

Inflation in Europe is surging and this is a big concern for me.

But hold on a minute you say…isn’t economic growth in Europe coming to a quick halt with all the talk about Greece defaulting and Spain and Italy close to following in Greece’s footsteps?

Eurostat, the official statistics agency of the European Union, said that consumer prices in the 17-member eurozone rose three percent in the 12-months ended September 30, 2011, up from 2.5% for the 12 months ended August 30, 2011, and 25% above the European Central Bank’s target of two percent!

But oil prices dropped sharply in September, as did consumer and business spending in Europe. How can inflation be rising so fast?

There are many reasons why inflation could be rising so sharply inEurope, most of which have to do with producer prices. What I’m really concerned with, what I believe no one is focusing on inNorth America, is the possibility of rapid inflation here. Why is it such a big deal? Because higher inflation leads to higher interest rates—again, something no one is talking about.

Inflation can be a huge problem for us. Yes, I know many are concerned with the U.S. following in the footsteps of Japan’s lost decade of the 1990s, when deflation was the problem, not inflation. But during our crisis, the Fed greatly expanded the money supply—something the Japanese central bank did not do.

The proverbial “dollar printing press” in America has been running over time for more than two years now. A Fed with trillions of dollars in securities on its balance sheet…where did that money come from?

History has many examples of how governments with record-high debt levels (like the U.S. today) and the fiat currencies of those governments being greatly increased (like the U.S. today) are a lethal combination for inflation.

As crazy as it sounds, this is the real risk of what we face in the very near future. It’s also what the price of gold bullion has been telling us during its 10-year bull market: High risk of inflation ahead.

Michael’s Personal Notes:

The general consensus among economists now is that we are falling back into recession…something I’ve been writing about for months. I’m happy that so many latecomers are seeing the light.

I’d like to point out some important facts for my readers:

Firstly, the stock market is acting as if we are already in a recession. The dividend yields on many major American corporations are back up to four percent...in an environment where the 10-year U.S. Treasury is yielding 1.8%. The stock market is saying that it believes companies will cut their dividends. The bond market is saying that we are headed for years of no economic growth.

Secondly, for most unemployed Americans, we never left the first recession.

Thirdly, a “recession” is simply the official term for two consecutive quarters or more of declining Gross Domestic Product (GDP). The term “recession” serves no purpose other than to further dampen consumer confidence. Unemployment can be high, corporate profits can be soft, consumer demand could be weak—and we can be classified as not being in a recession if we don’t hit those two consecutive quarters of declining GDP.

The obvious point is that the economy is slowing. The not-so-clear question is: how deep will the second half of the recession hit? We’ll get the answer to that question over the next couple of months, as more economic data are released and analyzed. As always, we’ll do our best to prepare our readers for what we think lies ahead.

Where the Market Stands; Where it’s Headed:

Contrary to what most analysts are saying, I think the stock market has become severely oversold. I believe we will get a meaningful bounce from the depressed valuations of equities that we are currently witnessing. I also believe the bounce will be in the confines of the bear market rally I’ve been writing about.

We started a bear market rally in March of 2009. This rally, in my opinion, is not over yet. I see the stock market moving up further, one final blow-off to higher price levels, before the bear market rally finally retires and Phase III of the bear market sets in.

What He Said:

“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.