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  • On The Fed, Deflation, Government Shutdown & The Moon

    Once again this week, we touch on a variety of topics that piqued my interest over the last week. We begin with some further analysis of the Fed’s controversial decision to hold interest rates near zero last Thursday. While this was the topic of my Blog last Thursday, I have more analysis today that I think you’ll find interesting.

    One thing I conclude from the Fed’s decision last week is that Fed Chair Janet Yellen and a growing number of her colleagues are worried about deflation spreading to the US. Since most Americans living today have never experienced a prolonged period of deflation, we should talk about it at least briefly to understand why falling prices are bad for the economy.

    Next, as much as I hate to bring it up, we could be facing yet another government shutdown at the end of this month. Fiscal Year 2015 ends one week from tomorrow, and Congress has not passed a budget for FY2016. As a result, the government could effectively shut down starting on October 1. Here we go again.

    From there, we look at a new report which finds that the $13 trillion in government “debt held by the public” equals a record $107,000 per US household. Yet if we include all of our national debt of $18.4 trillion, that number goes up to over $150,000 per household.

    Finally, a rare combination of celestial events will grace the night sky later this month. NASA says a SuperMoon, a BloodMoon and a lunar eclipse will take place on the night of September 27, this coming Sunday. This rare event has happened only five times since 1900, most recently in 1982, and there won't be another one until 2033. Read about it at the end of today’s E-Letter so that you won’t miss it this Sunday night.

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  • January Inflation Turns Negative - Is Deflation Upon Us?

    Consumer prices fell in January for the third straight month, while inflation over the past 12 months turned negative for the first time since 2009, largely because of cheaper gasoline. In January, the Consumer Price Index sank by a seasonally-adjusted 0.7%, the biggest one-month drop since the end of 2008, the Labor Department reported Thursday.

    The pace of inflation over the past 12 months, as measured by the CPI, fell to negative 0.1%, and it’s down sharply from 2.1% last summer shortly before crude prices collapsed. That’s the lowest annual rate since late 2009/early 2010. If this trend continues, we will fall into deflation.

    Deflation, not to be confused with disinflation, or a slowing rate of inflation, is dangerous because it reduces the supply of money and credit flowing through the economy, and it can create less demand for big-ticket items from cars to washing machines. At its worst, dwindling demand can lead to global depression.

    Many investors are celebrating the widely-held belief that lower inflation is good for stocks and higher inflation is bad. But, as is often the case, this conventional wisdom is misleading, if not plain wrong. A study by the by the National Bureau of Economic Research found that corporate earnings and inflation tend to move up and down together, generally speaking. So the idea that lower inflation is good for stocks may be dead wrong.

    But before we get into that discussion, let’s take a look at last Friday’s report on 4Q Gross Domestic Product, which was a disappointment. At the end of today’s E-Letter, I will comment on Fed Chair Janet Yellen’s testimony before the Senate last week. And we will end with some thoughts on President Obama’s quest to reach a nuclear deal with Iran.

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  • Deflation Is Spreading In Europe – Is America Next?

    US consumer prices fell in December by the largest amount in six years, reflecting another big monthly decline in gas prices and providing further evidence of falling inflation pressures. The Labor Department said Friday that its Consumer Price Index dropped 0.4% in December, the largest one-month drop since December 2008.

    Consumer prices also fell in the Eurozone in December by 0.2% for the first time in over five years. Given that consumer prices in the US and Europe went negative in December, we are hearing a lot more talk about deflation – which is a general decrease in prices for goods and services.

    A general decline in prices may sound good on paper but when deflation takes hold, it can wreak havoc on the economy. That’s because consumers and businesses have an incentive to delay purchases and investment since prices are expected to fall further. Deflation strangles borrowers because their debts get harder to repay. Just ask Japan.

    With the growing concern about the threat of deflation, I am receiving more requests from clients and readers to address it. While I don’t think deflation will take hold in the US anytime soon, it is growing rapidly in parts of Europe, one of our largest trading partners, and elsewhere. So today, we will focus on deflation and the trouble with falling prices.

    Before we go there, I would like to discuss two important recent economic reports. The first is last Friday’s unemployment report for January which was widely hailed by the mainstream media. The other recent report we’ll look at is the January Consumer Confidence Index which surged higher than anyone expected.

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  • The Slowing Economy & the Fed’s Dilemma

    IN THIS ISSUE:

    1. The Economic Slowdown Continues

    2. Confidence & Employment Remain in Retreat

    3. Bernanke Announces Fed's Latest Plan

    4. Is Obama Planning a "September Surprise"?

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  • Inflation, Deflation or Stagflation?

    IN THIS ISSUE:

    1. The Inflation/Deflation Debate

    2. Why Governments Love Inflation

    3. Deflation – Beyond Lower Prices

    4. The Shock Doctrine

    5. What You Should Be Doing

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  • Who Will Buy America’s Trillions In New Debt?

    Since taking office on January 20, President Barack Obama has proposed new government spending of almost $3 trillion dollars. Yes, $3 trillion consisting of his $787 billion "stimulus" package, up to $2 trillion in bank bailouts proposed by Treasury Secretary Geithner earlier this month, and another $275 billion for homeowners and mortgage companies that Obama announced last week. The question is, who is going to buy this gargantuan amount of US Treasury debt over the next few years? With the global recession, the largest foreign buyers of Treasuries, like China, Japan and Europe, may not be in a position to keep buying our debt. It now appears the US Federal Reserve will be called upon as the "lender of last resort," but the Fed will be forced to print these trillions in new money. That could trigger another round of big inflation (hyperinflation, some predict) in the coming years. This week, I will explore the implications of this record spending and borrowing. Be warned that what follows is not pretty, but it is what it is. The latest plunge in the stock markets is indicative of just how precarious the situation is. As investors, we need to understand what is happening and how to react to it. Let's get started....
  • Obama Seeks Multi-Trillion Dollar Bailouts

    This week we start with a review of the latest economic data which indicate that the recession is still deepening. Following that, we will examine the $800+ billion stimulus plan that President Obama requested and the House passed last week. Unfortunately, apprx. two-thirds of that massive plan is pork-barrel spending that will not help the economy anytime soon or at all. Next, we will look at Obama's request for $1-$2 trillion to help the banking system. And finally, we will address the fact that the Fed is gearing up to directly purchase hundreds of billions of long-term Treasury bonds in case the massive bailouts don't work. It should be a lively letter!...
  • Economic & Investment Outlook For 2009

    As we kick off the New Year, let's review the latest dismal economic and financial data and the consensus views of what lies ahead in 2009 for the economy, the credit crisis and the markets. As you might expect, most of my trusted sources believe that the recession will be with us for a while, but there is hope that the economy will begin to bottom out sometime late this year - aided by more huge government bailouts that President-elect Obama has in store for us....
  • The Recession & More Government Bailouts

    Well, the 'R' Word (recession) can now be officially used to describe the US economy since the National Bureau of Economic Research (NBER) declared that we have been in a recession since December of 2007. Considering the back-dated nature of NBER's announcement, we find ourselves in the midst of the third longest recession since the Great Depression, with no end yet in sight. No wonder the Treasury and Fed are pulling out all of the stops to bail out the economy. This week, I'm going to discuss the current bleak economic picture, the Fed's latest bailout and the possible long-term consequences of the Fed's printing money....