Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

What I’m Worried About Over the Next Four Years…

Wednesday, November 14th, 2012
By for Profit Confidential

Over the Next Four YearsBefore the U.S. elections, there was hype about the housing market getting better, the stock markets soaring, and unemployment decreasing. But truth be told; there is no growth in the U.S. economy. As they say, the “devil is in the details.” The numbers only look good on the surface.

In these pages, I have discussed how, in spite of media reports to the contrary; the housing market in the U.S. economy is very weak. Robert Shiller, creator of Standard & Poor’s/Case Shiller Index, agrees. In an interview with CNBC, he asserted that it is still unclear if there is actually a recovery in the U.S. housing market. He stated it could take up to 50 years for the housing market to get to where it was before the housing bubble burst. (Source: CNBC, October 31, 2012.)

During economic growth, you want to see consumer demand and overall activity in the economy increase. Looking at the longer-term picture for the U.S. economy, it’s as blurry as it can get. The demand for the most basic needs by consumers is falling in the U.S. economy, while economic activity is decreasing—the last thing you want when you are searching for economic growth.

American Electric Power Company, Inc. (NYSE/AEP), a utility company that delivers electricity to five million customers and has business in 11 states, reported that earnings fell 48% in the third quarter due to poor consumer demand, customer defection. and some costs associated with storm clean-up. (Source: Bloomberg, October 24, 2012.) Economic growth or not, utilities companies tend to be stable most of the time—but that’s not the case in the current U.S. economy.

While I’m happy the U.S. elections are over, I’m in that camp that believes not much will change over the next four years for the U.S. economy. The U.S. economy is headed the wrong way. If throwing money at our problems was the solution, the U.S. economy would not have been where it is today.

What I’m worried about over the next four years…

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Even if the taxes on the rich (those making over $250,000 a year) are increased; the amount of new money coming into the government coffers will not make a large dent in the annual deficits the government is running. If the government got very aggressive on raising taxes (which it won’t), we could go from a $1.3-trillion annual deficit to a $1.0-trillion annual deficit in the U.S. economy.

If government took the axe to spending, we could see $200 billion to $300 billion more off the annual deficit. However, with aggressive tax increases and government spending cuts, we are still looking at a an deficit of $700 trillion to $800 trillion for the U.S. economy, which still puts us on target for a $20.0-trillion deficit by the end of this decade, well above what we expect U.S. gross domestic product (GDP) to be in 2020.

Cut government spending more, raise taxes higher, and we just fall back into recession. A simple return to the norm for interest rates, which will surely happen as inflation becomes a threat to the U.S. economy, and even the most well thought out economic plans are thrown out the window.

Based on the three paragraphs you just read above, how can I be long-term positive on the U.S. economy?

Michael’s Personal Notes:

Central banks around the world are struggling to cope with a slowdown in the global economy. It is spreading from one country to another like a forest fire. Wealth destruction is spreading around the globe. To begin with, it was the financial crisis that took a heavy toll on the global economy, then the eurozone credit crisis made the situation worse.

Keep in mind that we live in a world where every country is related to one another. No one country is isolated in the global economy.

After the financial crisis hit in the U.S., central banks had options to steer away from the crisis. But I don’t think they have much artillery left. What can they do? Lower interest rates below zero? Print more money?

Central banks in the global economy have been keeping interest rates artificially near zero for years now. It’s not just the advanced economies; the emerging economies have done the same. Using interest rates as leverage to fight the slowdown in the global economy can be looked upon as a central bank tool that has been exhausted.

So one option remains for central banks, especially those bent on lowering their currencies to spur their exports, and that option is printing more fiat money.

For instance, the central bank of Japan is going ahead with an unlimited lending program. The plan is to boost lending—by flooding the economy with more currency, as demand for credit in the country remains weak. (Source: Business Week, November 5, 2012.)

Other central banks are taking the same approach. The European Central Bank (ECB) has announced an unlimited bond-buying program. The bank will buy sovereign debt from debt-ridden countries. (Source: Reuters, November 7, 2012.) How? I’m not sure, with Germany’s resistance to money printing in the eurozone.

The central banks in the global economy want lending to increase. Their belief is that, once lending increases, demand will eventually increase. Unfortunately, their reasoning is right, but they need to realize that businesses are concerned about the uncertainties.

Companies are sitting on a record amount of cash—not making investments and hiring—so they don’t really need to borrow. This concept of “have money, afraid to invest, will not borrow” could stick around for years to come.

Where the Market Stands; Where it’s Headed:

We are getting close to the end of a bear market rally in stocks that started in March of 2009. This rally, which can also be referred to as a “sucker’s rally,” has been extended by record government spending (paid for by debt), artificially low interest rates, and unprecedented expansion of the money supply (money printing). The government and Federal Reserve have been fighting the bear tooth and nail and winning. But both the government and Fed are running out of ammunition to keep the rally going.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00 an ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in Profit Confidential, March 14, 2007. Gold bullion was trading for under $300.00 an ounce when Michael first started recommending gold-related investments.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles