Inflation at Almost 5%…Is It Any Wonder Dollars Buy Less and Less?

Gold prices rising for 10 years straight…the money supply greatly expanded…the printing press for dollars running overtime…am I the only one concerned about rapid inflation?

I rarely read or hear a report talking about today’s rising prices or the hyperinflation we may sustain in the years ahead. We all know prices are rising—only housing prices have remained low. Inflation is real and it is here now.

The U.S. consumer-price index (CPI) increased 0.4% in August. That’s an annual inflation rate of 4.8%! Why are we not hearing and reading more about this? The only vocal entity on inflation has been gold bullion. The rise in the price of gold is shouting, “Inflation ahead!”

By keeping interest rates so low, by increasing the money supply, the Fed is spurring inflation. And that’s what we all want: inflation, not deflation. So the Fed has us pointed in the right direction. The trick for the Fed will be eventually bringing interest rates up ever so gently when inflation starts to get out of control.

Unfortunately, consumers are suffering from inflation today. Retirees who will not accept risk with their investments are stuck with 10-year Treasuries paying a measly two percent. With inflation at 4.8%, consumers’ money is losing 2.8% of its value over 12 months.

Inflation is a problem today, my dear readers, and it will be a bigger problem tomorrow. Keep the gold investments. They’ll be even more valuable as time passes and inflation really takes hold in this country.

Michael’s Personal Notes:

Jobless claims rose by 11,000 to 428,000 last week—the highest level since June, according to the U.S. Labor Department. Wow! Jobs continue to be a big economic problem in this country. Bank of America (NYSE/BAC) is the latest large company to announce major layoffs plans.

Until employment in this country gets back on track, the housing market will not recover. And until the housing market recovers, the economy will continue to be anemic. That’s simple economic analysis.

I’ve been thinking more and more about Obama’s American Jobs Bill and I don’t believe it’s the answer. It will just add billions to our debt burden.

The answer, my dear reader, the answer to creating old-fashioned jobs in this country, is capitalism and entrepreneurship. That’s what created this great country in the first place.

Drastically lowering taxes will create jobs. A flat tax across the board—say 20% or 25%—with a valued-added sales tax on the purchase of items, like they have in countries such as Canada, is the only way to really get the economy going and to create jobs. Unfortunately, the Obama administration has never put forth any such proposal.

Where the Market Stands: Where it’s Headed:

We are in a bear market rally that started in March of 2009. While 30 months’ old and tired, this bear market rally has more life left in it. I believe that the rally will push stock prices even higher, as the bear lures more investors back into the stock market.

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American-grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: Recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

Gold: Getting Ready for the Coming Correction

By Michael Lombardi, MBA

I’ve learned many things about investing over a career that has spanned 30 years. One of the biggest lessons is that not a single investment goes either straight up or straight down.

When an investment is rising in price (bull market), there are usually dips and corrections on the way up. Just look at the long-term secular bull market in stocks that started in the early 1980s and ended in 2007—there were many times stocks “took it on the chin” during that 25-year bull market run.

On the other side of the equation, not a single investment goes straight down either during a bear market. Just look at the U.S. new-home-builder stocks.

As these stocks started collapsing in 2006 with the real estate market, there were many rallies in the prices of home-builder stocks, as the new long-term downtrend in these stocks entrenched itself. Investors lacking experience would have bought on these rallies thinking that the home-builder stocks were showing life again. Most investors fail to realize the strength of a long-term bull or bear market.

And that brings me to gold bullion.

Long-term readers know I’ve been a big believer in gold investments since late 2001, when gold traded at about $300.00 per ounce. Each time that gold prices pulled back (five percent to 10% corrections); I would suggest dollar cost averaging down—buying more gold investments on price weakness of the metal.

Over the past 12 months, gold bullion has risen an astonishing $611.00U.S.per ounce—up 49%. The rise from $1,700 to $1,800 to $1,900 an ounce has been too swift and quick for me.

I’m warning my readers to expect a correction in the price of gold bullion. That correction could bring the metal back to $1,600, even $1,500 an ounce. However, I would view a pullback in the price of gold bullion as an opportunity…an opportunity to buy more gold investments at lower prices. My investing in gold preference would be the stocks of junior and senior gold-producing companies.

I believe we are in a long-term bull market in gold that will eventually see the metal at $2,500, even $3,000 per ounce. I’ve had this opinion for years and I continue to view any price correction in the long-term bull market in gold as an opportunity.

Michael’s Personal Notes:

Should you follow Warren Buffett and make an investment in Bank of America Corporation (NYSE/BAC)?

Bank of America common stock has collapsed from $15.31 in January of this year to $7.91 today, a drop of 48%. The nation’s biggest bank was experiencing a vote of non-confidence from investors. In my opinion, it brought on Buffett as a big investor in the bank to show “a vote of confidence” in the stock and the bank.

But the average investor cannot get the deal Buffett received for his $5.0 billion. Buffett’s Berkshire Hathaway investment was in preferred stock of Bank of America. These preference shares will pay Berkshire Hathaway six percent per annum. An investor buying the common stock of Bank of America gets a dividend yield equal to less than one-tenth that.

As an inducement, Buffett can buy another 700 million common shares of  Bank of America at $7.14. The stock sits at $7.91 today. Buffett is already “in the money.” Regular investors will not be able to get this deal in the open market.

Finally, Bank of America can give Buffett back his $5.0 billion at any time…but they will have to pay a “goodbye fee” of $250 million to get rid of him.

Personally, I’m not a big fan of Bank of America stock. I believe the company has plenty of problems. It could take years to turn it around.

Buffett’s recent investment in Bank of America makes sense for him. The average investor can’t get the same deal Buffett did. And I notice Buffett didn’t buy any of the common shares.

Where the Market Stands; Where it’s Headed:

The stock market sits today at about the same place it started 2011. Investor and stock advisor sentiment is quite negative. Monetary stimulus continues to be expansive. The yields on stocks are attractive compared to government bond yields. These three factors alone provide a positive backdrop for stocks.

However, economic conditions are very fragile. Consumers, worried about the economy, are increasing their savings as opposed to spending. The depressed housing market continues to be a drag on the economy. Jobs are difficult to create in a country that has lost its manufacturing base.

The immediate-term market conditions remain favorable to stocks and that’s why I believe the bear market rally will bring stocks higher. However, the short-term to long-term outlook is quite negative, hence why I continue to believe that all we’ve really been experiencing since March 2009 is a rally within the confines of a general bear market.

What He Said:

“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt the most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.