Following Japan’s Steps into Economic Oblivion

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

As an avid student of economics and the stock market, sometimes I can only sit back, look at the past few years and feel anger for those in “power” who let this situation happen.

Alan Greenspan, I’ve long felt, should have never brought interest rates so low in the summer of 2004. By doing so, he unleashed a real estate boom the likes of which the United States had never seen. Consumers borrowed money at very low rates (sometimes without income verification) for homes they could never really afford.

When the real estate market started deflating, it was inconceivable to read statements by Greenspan that the decline in the property market would not affect the remainder of the economy. It was also inexcusable for a major realtors’ association to run full-page ads in 2006 telling us that there was never a better time to buy a home.

The real estate bust led to an economic blood bath that so far has resulted in 7.3 million Americans losing their jobs since the recession started in December 2007. And how are we dealing with the bust? Well, we’ve dealt with it by bringing interest rates even lower (to zero) and by increasing our national debt to levels that I believe are unsustainable.

The more monetary and fiscal stimulus that is injected into the economy, the greater the economic expansion or contract will be. We’ve seen this proven many times. The natural forces of economic expansions and contractions, just like a bull and bear market, should not be tampered with, as it makes the pain more unbearable. Just ask 7.3 million Americans about that.

Last week, President Obama passed into law a plan to expand first-time homebuyers’ tax credits, provide tax refunds for money-losing companies and extend jobless benefits. Each time I read about additions to our national debt, I cringe at the thought of where the money will come from.

The United States is unfortunately following the path of Japan during its financial crisis. Interest rates of zero and ever-rising government debt in Japan never fixed their financial crisis.

Finally, I don’t believe investors like Warren Buffett and others who say that the worst is behind us for the economy. We cannot live at zero interest rates forever. We cannot continue increasing our national debt each passing day. As some point, this will all need to stop. And that is exactly what the ever-increasing price of gold bullion and the continued decline in the value of the U.S. dollar are
telling us.

Michael’s Personal Notes:

The real estate market in Miami has only deteriorated since my last trip here in late August. Condo prices in this once “condo boom” city continue to fall. I’ve never seen so many bank-foreclosed properties. Now it’s the commercial real estate market that is really starting to hurt.

Banks do not want to finance (or refinance) commercial and industrial buildings. Businesspeople I speak to here tell me that their rents are coming down, because there are so many empty buildings competing for good tenants. I was in an industrial area Friday (buildings from 20,000 to 50,000 square feet in size) and I could not believe the amount of “for lease” and “for sale” signs in front of them.

Local realty magazines that were once dominated by full-page ads announcing new condo projects have seen those types of ads replaced by straight listings of bank-foreclosed condos for sale. The real estate market in south Florida is far from bottoming out in respect to price or inventory on the market. To those readers who wrote in asking if now was the time to buy an investment or vacation property in Florida, I would say that it is still too early. Prices for such properties here keep falling.

Where the Market Stands:

The Dow Jones Industrial Average sits 17% higher this morning than when it started 2009. Two facts: first, investors would have done much better this year investing in the stock market as opposed to T-bills, CDs, or GICs. The market is up an incredible 59% since its March 2009 low. It has been a truly remarkable year for the stock market.

Second, each time the market moves to a new high, all I hear or read about is criticism for the move higher. “How can that happen?” or “Stocks will just crash again,” is what I hear and read. This attitude bodes well for the stock market. All I can tell my readers about the stock market is to stay the course, as stocks have always loved climbing the “wall of worry.”

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008, to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.