The roots of America’s economic malaise can be traced back to 2006 when the U.S. housing bubble burst. This sent the dominos tumbling, and the United States into an economic meltdown in 2008. In spite of government intervention, the economy has sputtered and slipped into recession. The U.S. could be heading back that way in 2013.
The Federal Reserve has kept the economy alive the past four years by keeping the printing presses running overtime. The Fed can’t lower interest rates below zero. And, the more money the Fed prints, the greater the risk of inflation and the higher long-term interest rates will eventually move, stifling the economy.
The U.S. government has no money left to bail us out during the next recession. The government is over-extended—if it was a business, it would be bankrupt right now. The after-effects of the next leg of the bear market could be much worse than the Great Recession.
Since 2001, readers have turned to Michael Lombardi’s famous daily economic newsletter Profit Confidential for stock market guidance. Determining the overall direction of the stock market is very important—whether it’s a bear market or a bull market—is first and foremost in our analysis.
Profit Confidential is our free daily e-letter that goes to all our Lombardi Financial customers and to any investor who wishes to opt-in to receive it. Written by Lombardi Financial editors who have been offering stock market guidance to Lombardi customers for years, Profit Confidential provides a macro-picture on where the stock market is headed.
We start by determining if we are in a bear market or a bull market; based on that analysis, we look at what sectors are hot and what sectors to avoid.
Profit Confidential also famously warned its readers to bail from stocks in 2007 (the bull market was over, and a bear market was setting in), telling investors to jump back into the stock market in March of 2009 (a bear market rally began).
Michael was one of the first to predict the U.S. economy would be in a recession by late 2007. On March 22, 2007, he warned, “Over the past few weeks, I’ve written about subprime lenders, and how their demise will hurt the U.S. housing market, the economy, and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fuelled the housing boom that peaked in 2005, has yet to arrive.”
At the same time Michael wrote that former Federal Reserve Chairman Alan Greenspan said, “The worst is over for the U.S. housing market, and there will be no economic spillover effects from the poor housing market.”
Michael also warned his readers in advance of the crash in the stock market of 2008. On November 29, 2007, Michael predicted, “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 reality 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 America.”
The Dow Jones peaked at 14,279 in October 2007. A “sucker’s rally” developed in November 2007, which Michael quickly classified as a bear trap for his readers. One year later, the Dow Jones Industrial Average was at 8,726.
Profit Confidential turned bullish on stocks in March of 2009 and rode the bear market rally from a Dow Jones Industrial Average of 6,440 on March 9, 2009 to 12,876 on May 2, 2011, a gain of 99%.
The two-year stock market rally is coming to an end. The start of a bear market doesn’t mean investors should run to the sidelines. In fact, the bear market will present investors with an unprecedented opportunity.
In 2013, Michael predicts that the devaluation of the U.S. dollar that started in early 2009 will accelerate as the U.S. economy deteriorates, that gold prices will continue to rise, and that the euro is done. Michael also predicts that inflation will be a big, big problem for the U.S.; probably for the rest of the decade. Finally, Michael believes that 2013 will be a poor year for stocks.
It’s not all doom and gloom, though. He also has ways investors can protect their holdings and even make money off the weak economy.
Back in late 2011, I created a widely circulated video that included six predictions. I hit it on the head with five of those predictions. But the winners are not what are important to my readers today; it’s the prediction I didn’t get right that’s vital now
Back then, I said the U.S. dollar was “dead” and wouldn’t go anywhere. I pointed out that if it were not for the continued crisis in the eurozone, the greenback would fall flat on its face. The dollar hasn’t gone anywhere since. And if it were not for investors taking their money out of European banks and moving them into U.S. dollars, our dollar could have collapsed.
My second prediction back then was that the euro would decline in value. And it has. Prediction three was that both interest rates and inflation would rise. The yield on the 10-year U.S. Treasury has risen about 50% since then. As for inflation, if we calculate it the way the Consumer Price Index (CPI) was calculated when Jimmy Carter was president, it would be almost three times the rate the government tells us it is today.
I compared the rally in stocks that started in 2009 to the period following the 1929 stock market crash (1934 to 1937) and warned that stock prices would eventually follow the same fate they did after the “fake” stock market rally that followed the 1929 crash. I still have that opinion today.
Since the announcement from the Federal Reserve about tapering off quantitative easing, the key stock indices have been showing increased selling pressures. Just take a look at the chart of the S&P 500 below.
Chart courtesy of www.StockCharts.com
The S&P 500 started 2013 with momentum to the upside. Investors bought in hopes that the index would continue to go higher, and by no surprise, it did reach its all-time high. As expected, after the Federal Reserve announcement, sellers took hold of the S&P 500, and it broke below its 50-day moving average for the first time this year (indicated by the black circle in the chart above)—a bearish indicator, according to technical analysts.
The last time the S&P 500 reached this far below its 50-day moving average was in October 2012. When that happened, the S&P 500 declined six percent, and it didn’t recover until December (as noted by the green circle in the above chart).
Note: other key stock indices like the Dow Jones Industrial Average and the NASDAQ Composite Index have also fallen below their 50-day moving averages.
Looking at this, I have to ask: is the bear market rally that lured investors into buying over?
The decline in the key stock indices has certainly proved my theory: money printing was a major factor in their flight to their all-time highs. Now, when we have hints that the Federal Reserve will be pulling back on its quantitative easing, the key stock indices are sliding lower.
As of March of this year, 47.7 million Americans are now on some form of food stamps. Between 2000 and 2012, the number of Americans resorting to food stamps increased more than 171%. In 2000, there were just 17.1 million Americans on food stamps. (Source: U.S. Department of Agriculture, June 7, 2013.)
There are more individuals on food stamps in the U.S. economy than the entire population of Spain—46.17 million. (Source: World Bank web site, last accessed June 21, 2013.)
That costs the government money. The expenditure for food stamps in 2012 was $74.6 billion, almost 116% higher than what it paid in 2008. That’s a cost that could pick up even more speed if, as all indicators show, inflation begins to rise.
The key stock indices in the U.S. economy have skyrocketed since the Great Recession, due in large part to money printing, but the average American Joe hasn’t seen his living conditions improve—in fact, they have actually deteriorated.
Instead, the rich appear to be getting richer and the poor are facing more challenges, while the middle class is disintegrating. According to a Pew Research report, the bottom 93% of households in the U.S. economy witnessed their net worth drop by four percent between 2009 and 2011. The richest seven percent of U.S. households saw their wealth increase by 28% in the same period. (Source: Associated Press, April 23, 2013.)
The misery for the middle class doesn’t end here; the Census Bureau reported in the first-quarter that home ownership in the U.S. economy dropped to its lowest level in 18 years. Just 65% of Americans owned their homes in … Read More
While an economic slowdown is looming over the global economy, no one seems to care, as stock markets continue to reach new record-highs—giving investors false hopes of economic growth. But how long can this mirage actually last?
The economic slowdown in the global economy I’m talking about is a worldwide pullback in growth. Take India as the first example. According to India’s Central Statistics Office, the Indian economy is growing at five percent—its slowest pace in a decade! The director general of the Confederation of Indian Industry was quoted late last week as saying, “With no visible pick-up in any key levers of the economy, the situation remains grim.” (Source: Mallet, V., “India records slowest growth in a decade,” Financial Times, May 31, 2013.)
China, the second-biggest economic hub in the global economy, is facing headwinds, as its economy is growing at its slowest pace since 2009. Japan has undergone the largest per-capita quantitative easing program in history (its debt-to-gross domestic product [GDP] is running above 200%), and that country is back in a recession.
The unemployment rate in the eurozone was reported last week at 12.2% for April. It was 12.1% in March. The unemployment rate in Spain stood at 26.8 % and in Portugal, it stood at 17.8%. (Source: Eurostat web site, May 31, 2013.)
And industrial metal prices, which are supposed to be a leading indicator, are all heading downward.
Take a look at the chart below of the Dow Jones-UBS Industrial Metals Index. This index provides an overall picture of the performance of industrial metals.
Chart courtesy of www.StockCharts.com
Since the beginning of the … Read More
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