Stock prices continued to rally today, with the Dow Jones Industrial Average advancing 76 points from yesterday's close. However when you look at them in terms of gold, stocks have continued to trend lower.
While pricing stocks in gold might at first seem strange, you should note that the purchasing power of the U.S. dollar has already hit another all-time low against the euro and will likely fall further as a result of yesterday's interest rate cut. So, even if your stock portfolio were to continue rallying, the purchasing power of those holdings may still fall.
Therefore, I suggest you not get caught up in all the hoopla concerning the Fed's attempt to stimulate economic growth. Because, just as legendary investor Jim Rogers said yesterday morning, "Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse". Rogers went on to say, "If Bernanke starts running those printing presses even faster than he's doing already, yes we are going to have a serious recession. The dollar's going to collapse … [and] there's going to be a lot of problems in the U.S."
Yesterday's move by the Federal Reserve to cut both its target Fed funds rate and the discount rate by 50 basis points clearly demonstrates that the Fed has come to the same conclusion as I have about the future direction of the U.S. economy — economic growth may fall considerably over the coming months and the economy could possibly enter a recession. But, the Fed has only made the situation worse, as yesterday's interest rate cut will likely have little impact on stimulating growth and will exacerbate inflationary pressures.
The Housing Market
Just yesterday, mortgage firm RealtyTrac reported that home foreclosures rose 36 percent during August, as compared to the previous month (and they more than doubled compared to the same period a year ago).
RealtyTrac's CEO James Saccacio said, "The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of sub-prime adjustable rate loans are beginning to reset now." Over the next three months, 137 billion of mortgages are scheduled to reset, with sub-prime mortgages comprising $88 billion of these mortgages.
By the way, homeowners who used adjustable-rate mortgages to purchase their homes face, on average, a 26 percent increase in their monthly mortgage payments (or $400 per month) beginning in the next three months.
And even though President Bush's government bailout for homeowners who used subprime mortgages to purchase their homes will likely be limited in its effectiveness because this program requires the borrower to have at least 3 percent equity in their homes. Very few homeowners who purchased their home over the past few years meet this requirement because the market value of many of those homes is currently less than the homeowner's mortgage debt.
To add fuel to the flame, earlier today the U.S. Department of Commerce reported that new housing starts — a key leading economic indicator — fell during August to their lowest level since 1995.
In light of the fact that the inventory of homes for sale is currently at its highest level since 1999, construction of new homes and home values will likely continue to fall. And given that 40 - 50 percent of all jobs created over the past five years were related to the housing market, my research suggests consumer spending will also continue to decline in the months ahead.
This is a very important development, because consumer spending accounts for approximately 70 percent of the U.S.'s total output of goods and services (GDP). Hence, my models indicate yesterday's interest rate cut will have, at best, minimal impact on stimulating economic growth over the coming months.
Oil Prices and the Dollar
While the fallout from the subprime mortgage debacle and the slumping housing market suggests economic growth will slow considerably going forward, rising commodity prices and the declining value of the dollar suggests inflation could rise dramatically over the coming months.
Oil prices have already risen 11 percent in September and are likely headed higher over the near-term, as the demand for oil continues to significantly outstrip the available supply — demand is currently around 88 million barrels per day versus supplies of only 85 million. Meanwhile, heating oil futures rose yesterday to their highest level since 1978.
But, as I've mentioned on several occasions over the past couple of weeks, there are numerous ETFs that help you profit from a slowing economy and rising inflation. If you'd like to learn more about these ETFs, you may want to try our new investment letter — The ETF Strategist.
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