Yes, there many similarities between the Japan of the 1990s and the U.S. of the 2000s. Japan’s real estate market and stock market both peaked in euphoria and collapsed, just like they’ve done here.

Today, the yields on government bonds in the U.S. have collapsed as investors run to safety (I find the concept that people find security in U.S. T-bills ironic). A two-year U.S T-bill pays about 0.20% today. In Japan, two-year government bonds pay 0.15%—U.S. government bonds are close to matching the yield on Japanese government bonds for the first time in 20 years.

But there are two big differences between Japan and the U.S., after their economic crashes. The difference leads me to believe that we will not follow the path of Japan. In fact, we will take a different path and face inflation, not deflation. Here’s why.

About 95% of Japanese government bonds are bought by domestic investors. In the U.S., we have the opposite. About 50% of our bonds are bought by foreign investors.

This goes back to the question: at what point will foreign investors tire of the devaluation of the greenback, and the increasing U.S. deficit and national debt, and thus demand higher interest rates from U.S. Treasuries? That point, in my opinion, is not far off.

The next big difference between Japan and the U.S. has to do with each country’s respective action after their real estate market and stock market crashes.

Yes, both Japan and the U.S. are based on fiat currency systems, but the response from the central bank of each country post-economic crash has been very different.

After the Japanese economy collapsed, Japan’s central bank failed to do the one thing necessary to kick-start its economy: increase the money supply. In the 12 months following April 1992, when Japan was officially recognized as being in a severe recession, the broad money supply in Japan did not change. And only 10 years after the recession started did Japan begin any type of central bank quantitative easing (“QE”).

The Federal Reserve did the opposite. Once we were recognized to be in a recession in December of 2007, the Fed flooded the system with money. The Fed cranked up the printing presses and significantly increased the broad money supply. The Fed has already gone through two sets of QE and might be getting ready for QE3.

Two countries: Japan and the U.S.; both experienced the same crashes, a real estate market crash and a stock market crash. Japan’s central bank chose not to increase the broad money supply and the result was that Japan went into years of deflation.

The U.S. central bank has done the opposite following the crashes of its real estate market and stock market. The Fed has flooded the economic system with cash. It has greatly increased the broad money supply. Is stands ready to unleash another round of QE if necessary.

There is a tremendous, actually unprecedented, amount of liquidity in the U.S. economy thanks to the Fed. And that’s why I believe we will get the opposite of what Japan got. We won’t get years of deflation; we’ll get years of inflation, which is what the rise in the price of gold bullion has been yelling about.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 2005. 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.

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Hold on a minute. Didn’t the Fed say last week that it will keep short-term interest rates near zero until at least mid-2013? How can they keep interest rates low and fight rising inflation?

Here’s the worse-kept secret amongst us economists…

We want inflation. We want fast, sharp inflation. Why? Because if inflation returns, real estate market prices will rise in value and so will the stock market. When the assets consumers own are rising in value, they feel better about things, their confidence turns positive, and they start spending more.

Dealing with inflation is much easier than dealing with deflation. To tame inflation, the Fed raises interest rates. What does it do to fight deflation? Drop money from helicopters?

According to Barlow Research Associates, 53% of U.S. retailers with annual sales in the $10.0 million to $500 million range have lifted the prices they charge consumers over the past 12 months. Retailers are passing their higher costs to consumers.

We need inflation desperately. And the Fed, I believe, is doing everything in its power to get significant inflation going in this country. Just imagine if housing was rising in value, if your investments were rising in value once again, if real interest rates started to rise without affecting the economy.

If we do not get inflation going in this country soon, we could fall into deflation and follow Japan’s “lost decade,” a 10-year period where prices went down and the economy contracted.

All that money the Fed has been printing for months…those pressmen working overtime…maybe not a bad idea after all.

Michael’s Personal Notes:

I read a Bloomberg story (8/17/11) that said President Obama will deliver a speech after Labor Day weekend to the American people, whereby he will announce that he will be asking Congress for fresh money and more long-term cuts to the U.S. deficit. The story left me totally confused.

The way I read it…

Obama will ask Congress for billions in new dollars to boost the economy. He wants to cut taxes and increase infrastructure spending. The story then said the President will also ask Congress for more than the original $1.5 trillion in proposed long-term U.S. deficit cuts.

I don’t understand it. How can you increase spending to boost the economy, lower taxes, and reduce the deficit all at the same time? But then again, I’m not a politician.

Where the Market Stands; Where it’s Headed:

Some facts for my readers…

Last week, the S&P 500 capped off its biggest four-week loss since March of 2009. We all know what happened after March 2009; stocks went up 100%.

The S&P 500 closed last week at a price/earnings multiple of 12.2, the lowest since March of 2009. We all know what happened after March 2009, stocks went up 100%.

Bets by investors in hedge funds that bet against the stock market are now at their highest level since July 2009.

Dear reader, I am long-term bearish on America. Yes, I believe we have yet to see the worst of the bear market that started in late 2007. But the environment today is one of extreme negativity, extreme bearishness. Stocks do not traditionally go in the direction people think they are headed.

Over 90% of investors were scared out of their wits in March of 2009—and stocks went the other way. There is too much consensus on the stock market having thrown in the towel for 2011. Name me one analyst claiming the Dow Jones will surpass its May 2, 2011, high of 12,876. There are none.

The bear market rally that started in March of 2009 remains intact. I believe we will see higher stock prices again before the markets test their March 2009 lows.

What He Said:

“The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of bringing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate market bust would create havoc with the banking system.

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There is the group that believes the U.S. is following the same path as Japan in the 1990s and is headed to a decade of deflation. Then there’s the second group that believes that rapid inflation is more likely. I’m in the second group, and I’m getting some confirmation.

Yesterday, the U.S. Labor Department reported that the core producer price index (often referred to as the wholesale costs) rose 0.4% in July—twice the rate economists had forecast. In a nutshell, companies are paying more for their goods, and I believe those added costs will eventually be passed on to consumers.

It’s already happening in the U.K. Inflation in the U.K. accelerated at an annual rate of 4.4% in July—well above the Bank of England’s “acceptable” 3.0% level.

Inflation will accelerate and persist in America for two reasons:

Firstly, the printing of money at the Federal Reserve since 2008 has been unprecedented. The number of dollars in circulation—the money supply—has increased dramatically over the past two years. History has shown that the more fiat money a country issues, the less it’s eventually worth. We only need to look at countries like Argentina and Mexico to see classic examples of inflation and currency devaluation.

Secondly, the Federal Reserve and the government, I believe, will fight tooth and nail against deflation. If deflation starts to rear its ugly head, the government will just spend more money and the Fed will just print more money.

We experienced the unpleasantness of rapid inflation in the early 1980s. Fed Chairman Paul Volcker put an end to that inflation with record-high interest rates. History, minus the individual characters, could play out again. Only, this time, to add fuel to the fire, we have the unprecedented U.S. debt crisis. Is it any wonder the price of gold continues to rise unabated? Gold stocks will only move higher from here, as inflation returns to America.

Michael’s Personal Notes:

Could the second largest economy in Europe be catching the sovereign debt bug?

France bond yields spiked last week, as rumors surfaced that the country was about to do “an American” and lose its Triple-A credit rating.

What’s the fuss? Economic growth in France fell to zero in the second quarter of this year. In the first quarter of 2011, France’s gross domestic product (GDP) grew at an annualized rate of four percent.

Global Economic Analysis: Personally, I believe that the French government, which is very social in nature, has made a greater effort at reducing government spending. Austerity measures, which have not yet been introduced in America, have been passed in France. Some people might laugh at the idea of increasing the minimum retirement age from 60 to 62, but at least something was done.

If we look at straight debt and GDP, France’s national debt to GDP is 84.5% (Source: France’s National Institute of Statistics and Economic Studies). Our debt to GDP is much higher in the U.S., surpassing 100%.

I’m more positive on France than other analysts. It falls far behind Greece, Portugal, Spain and Italy on the “concern” list. I wouldn’t bet against the country. But I would bet that it will one day get tired of helping Germany carry the remainder of the weak euro currency members. It’s the euro that could be short-lived.

Where the Market Stands; Where it’s Headed:

If we look at the Dow Jones Industrial Average, it’s not down much for the year, a paltry 1.5%. Add in the Dow Jones’ rising dividend yield and the general stock market is not far from breakeven for 2011.

In fact, stocks are doing better this summer than they did last summer. By the end of August of 2010, stocks were down five percent for the year. For the calendar year 2010, stocks gained 10%.

Please, don’t get me wrong. The upside potential for stocks is limited. The easy money in this stock market has been made by the contrarian investors who had the courage to jump into stocks in the spring of 2009.

Phase three for the bear market (the worst phase) still hasn’t even started. What I am saying is that stocks, at this present moment, are more attractive as an investment than other vehicles, primarily bonds.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi, in PROFIT CONFIDENTIAL, May 27, 2005. 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.

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The U.S. is battling crippling debt levels and deficits. Some cities across the nation are shutting down to save money. The once powerful U.S. economic engine continues to show breaks and is stalling at this most critical time for the country.

Over in Europe, we have the PIGS (Portugal, Ireland, Greece, and Spain) sucking money from the European Union and International Monetary Fund and taking away the ability to focus on growth.

We are also seeing some economic fragility in the BRICS grouping (Brazil, Russia, India, China, and South Africa). Brazil, India, and China are seeing some stalling in their economies and stock markets.

In China, you have inflation surging to 6.4% in June, the highest level in about three years. The Chinese central bank has increased the bank reserve ratios in an effort to stall lending. Slowing in China has an impact on the domestic and global economies that deal with China.

Domestically, you have a national debt of $14.5 trillion and this will grow to over $16.0 trillion with the debt ceiling increasing.

Given all of this risk, you should have some capital working for you in gold.

Gold is considered a safe-haven play versus that of silver. Investing in gold is a safe haven play when the overall market risk rises, as what we are currently witnessing.

On the demand side, China is a significant buyer of gold and this is expected to continue as the country hoards physical gold in its reserves. India is also a major buyer..

.

The reality is that gold is a limited resource that needs to be found and mined. There is a certain amount of global reserves in the ground, but, after that, there needs to be more exploration..

Gold has rallied in each of the last 10 years and shows a beautiful bullish price chart. My gold advice would be to accumulate gold on weakness.

On the chart, the October Gold traded at a record high of $1,683.50 on August 4 before retrenching. The current chart looks bullish on strong Relative Strength. There is a “golden cross” on the chart, with the 50-day moving average (MA) of $1,558 well above the 200-day MA of $1,451.

Some pundits have come out and suggested a $2,000 target on gold over the next few years. I even saw a staggering $5,000 price target on gold. Now the latter may be an extreme, but I feel that gold prices will continue to edge higher, especially if the U.S. economy falters and another recession surfaces.

In the current climate, gold represents the best bet, while silver continues to be a trading commodity based on the economic recovery and demand for electronics and industrial applications.

My advice to you is to buy a mixture of exploration-stage gold miners along with small to large gold producers. In this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers .

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The answer for these questions is due to INFLATION. Basically, inflation is the enemy of money. It reduces the buying power of your cash on hand.

It is the reason why almost anything increased their price as the time goes by. We cannot avoid inflation to occur even the state cannot cut away it. They may reduce it to a certain percentage but to totally get rid of inflation is impossible.

Aftermaths of Inflation

Inflation has its helpful and negative effects. Normally, when people say inflation, they consider constantly of its negative effects.

For customers like us, we don’t like inflation since it will lessen the things that we may buy. Further, our money presently will be worth lesser than tomorrow or a year later.

If there’s an excessive inflation, investors may not invest in that country because of the high cost of doing business and cost of living. High inflation may also create turmoil and social unrest because many people cannot manage to buy food and other primary necessities because of excessive price.

On the other side, inflation can have its positive aftermath on the economy as a whole. Inflation may be used by the central banks to adapt its nominal interest rates and see for means to invest in non-monetary capital projects.

How Inflation is Measured?

Inflation is gauged by what we termed ‘inflation rate.’ Basically, it is the rate of change of Consumer Price Index (CPI) over a period of time, for instance, in a year. CPI is a price index or the alteration in price standard of consumer goods and services purchased by households.

Inflation rate is commonly expressed in percentage. High inflation rate means higher prices of consumer goods and services than before.

Why it is Valuable to Learn Inflation?

Inflation is much valuable when you are preparing to invest your money. I will give you an instance. Say, you have, P10,000 and you want to put in time deposit in 2010. Time deposit will typically give you an interest, for example at 5% per year. However, the inflation rate in 2010 is 6% at that one year interval when you invest your money in TD.

Question: Do you profit from investing in TD at that year? The quick answer will be NO. Why? Since the money you place in TD in fact lose 1% because of inflation. The real worth of your P10,000 now is only P9,900.

Summary

Inflation can have its positive and negative results in the society. However, it can also help you in your investing planning and decisions. Make sure that your investments will offer profit greater than the inflation rate.

Gil Tenorio is an investment blogger who likes blogging on saving, investing and loans. To read helpful details on What is Inflation, you should go to Financial Management blog.

According to Bloomberg’s survey of 9,000 stock analysts, the S&P 500 companies will earn 18% more in 2011 than they did in 2010. Despite this, the S&P is trading at 14.5 times last year’s earnings. Since 1991, the S&P has traded at an average of 20.5 times earnings.

Interest rates in the U.S. are not rising for the near future, as the unemployment rate remains high, the Fed is not pushing the inflation panic button yet, and the Fed is committed to a policy of monetary stimulus.

Stock prices have fallen 6.2% since May 2, 2011—and investors are in panic mode. While most investors have very short-term memories, I remember last year, in particular the period from April 2010 to the end of June 2010, when stock prices fell 16% and investors were panicking as well. Stocks subsequently rose 34% from the end of June 2010 to May 2011.

Investors pulled $5.46 billion out of stock mutual funds last week, according to the Investment Company Institute in Washington—the biggest withdrawal of money from stock mutual funds since the week ended December 8, 2010. From December 8, 2010 to May 2, 2011, stocks rose 12%.

The percentage of bullish stock advisors in the marketplace has fallen to a low not seen since September 2010 (Source: Investors Intelligence). The Dow Jones Industrial Average rose 22.6% from the beginning of September 2010 to May 2, 2011.

Michael’s Personal Notes:

Excellent story in this weekend’s New York Times on the backlog of residential home foreclosure cases across the country. The article refers to data from LPS Applied Analytics, which reports it would take “lenders 62 years at their current pace to repossess the 213,000 houses now in severe default or foreclosure” in New York State (New York Times, 6/19/11).

The article goes on to claim that millions in the U.S. are staying in their homes without making payments on their mortgages, as the foreclosure process grinds to a halt.

You may remember last fall’s controversy over banks foreclosing on homes without all the paperwork in order. This slowed the foreclosure process dramatically. Add to this a large number of homes still to be foreclosed on and the system is overwhelmed.

Do the banks really want more foreclosed homes on their books? I doubt it. It takes money to foreclose on a home and more money to sell it (real estate commissions, etc.). If I were a bank with tens of thousands of homes on my books, wouldn’t I want the people living in the homes to pay the utilities as opposed to my bank?

I’ve said this before: I have never seen the U.S. economy recover when the housing market hasn’t recovered with it. It will take another decade for any normality to return to the U.S. housing market. Hence, you can see why I’m so wary of the economic recovery and so concerned about a double-dip recession.

Where the Stands; Where it’s Headed:

My opinion remains unchanged: stocks are oversold. The bear market rally in stocks that started in March of 2009, although getting near its end, is still alive and well.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael began talking about and predicting the financial catastrophe we started experiencing in 2008, long before anyone else.

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Facing steep cuts in state aid, public colleges around the country have been forced to slash costs and raise tuition and fees. In some systems, like the University of California, colleges are accepting a higher proportion of out-of-state students who pay full tuition.

At most state schools, in-state residents pay a fraction of what out-of-state students pay. In the University of California network, the tuition paid by out-of-state students covers their educational costs whereas the reduced tuition paid by California residents must be coupled with state aid to make ends meet.

Prices at private colleges also increased rapidly, rising 4.4 percent last year, according to the College Board’s report. This is despite a significant decline in the Consumer Price Index of 2.1 percent from July 2008 to July 2009.