The Writing on the Wall for Investors

by Michael Lombardi, CFP, MBA

What a difference three months can make. In that time period, the new Administration in Washington has done the following:

— Created trillion-dollar annual deficits
— Doubled (or maybe even tripled) the money supply
— Promised $5.0 billion to $7.0 billion in new spending

What happens when a country’s money supply is expanded quickly at the same time that massive spending programs are created?

Higher interest rates and rapid inflation are the fear of many long-term economist thinkers these days. And I’m worried about them, too.

I’ve written extensively in PROFIT CONFIDENTIAL on why I see higher interest rates ahead. But I’ve shied away from the inflation debate until now. Why? Because our problem for the past two years has been deflation (or simply, falling prices).

Deflation was a serious threat to the U.S. And I believe our government did a great job in steering us away from the dreaded deflation. But, in my 25 years of studying the action of the Federal Reserve, it often “overshoots” in its in monetary goals.

That’s what I believe is happening right now. Only, it’s not just the Fed keeping interest rates low and expanding the money supply; it’s massive spending and bailout programs coming at the same time.

While most people will tell you, “Who cares about some inflation? Let’s get the economy going now,” we all know our actions of today determine our future of tomorrow. The “Writing on the Wall” I see for investors is higher interest rates and rapid inflation ahead. It will not happen this month, it may not happen this year, but, long-term, that is where we are headed. Investors should be adjusting and preparing their investment portfolios accordingly.

Michael’s Personal Notes:

If I can pick one message I have been trying to relay in PROFIT
CONFIDENTIAL over the past seven years that I believe is most important, it would be this: Own gold-related investments. Back in 2002, when I started recommending gold, it was trading under $300.00 per ounce. This morning gold is trading at close to $1,000 an ounce. I continue to believe that gold bullion will rise in price to a level that will surprise even the most optimistic gold bugs. The stocks of quality gold-producing companies are where the big profits will lie in the months and years ahead.

Where the Market Stands:

Finally, the grand dame of the stock market, the Dow Jones Industrial Average, has toyed with the idea of turning positive for 2009, an event I have been predicting since April 2009. As I write this issue this morning, the Dow Jones is only 35 points away from making 2009 a positive year. Stock prices are headed higher thanks to a rally in the confines of an overall bear market.

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other
major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s” rally developed in November 2007, which Michael quickly classified as bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.