Brokers’ Phones Ringing Loud This Time Around
Wednesday, January 23rd, 2008
By Michael Lombardi, MBA for Profit Confidential
On January 14 of this year, I wrote a PROFIT CONFIDENTIAL commentary entitled, “Bernanke Soon to the Rescue.” And that’s exactly what happened yesterday. Instead of waiting for next week’s regularly scheduled Fed meeting to bring down interest rates half a point as the market expected, the Fed dropped rates Tuesday morning by a whopping 75 basis points amid falling stock markets around the globe.
In my opinion, the Fed said, “The heck with supporting the dollar, let’s fend off this coming recession. To the rescue!” And it worked for the day, turning an early loss by the Dow Jones Industrial Average of 500 points into a closing loss of only 128 points for the bellwether index. But please note how I say it only worked for the day.
Of the 25-plus years I have spent analyzing the stock market and the economy… of all the years of studying American economic history… I have only seen the Federal Reserve fend off a recession once. And that was in the 2001-2004 period. This time, the Fed will not be able to stop the recession (that I predicted back in the summer of 2007), which will grip America in the first or second quarter of 2008.
The Fed was able to put off a recession in 2001-2004 by artificially reducing interest rates to their lowest level in 46-years. By doing this, Greenspan inadvertently created the housing boom and credit boom that ended in 2005. You can’t prevent economic contractions with monetary manipulation, you can only defer them. And that’s the scenario we are facing today. Unfortunately, the more you artificially delay the natural contraction of an economy, the harder the contraction that eventually follows is.
My many contacts on the Street tell me that their clients are calling now, more concerned about the stock market and the economy than they have ever been. The phone wasn’t ringing so loudly in 2001 after 9/11 because investors and consumers knew exactly what was happening. Today, investors are sincerely confused about what is going on with the credit market and that uncertainty plays a big part in consumers reducing their regular spending habits, leading us closer to recession.
And talk about the blind leading the blind: Most young stock brokers today have never dealt with a bear market or recession. What can they possibly say to their clients, except tell them to ride it out? (While the right advice is to get out.)
Next Post: A Recession-Proof IndustryPrevious Post: What Are Canadian Banks Waiting for?
Tags: Dow Jones Industrials, interest rates, recession, stock market
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Michael 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. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, 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
