Mortgaging Our Future for Today

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

I don’t know who I feel sorrier for today, our politicians or the young people of this country. Why? Because politicians have no idea how their actions of today will cause hardship for the next generation.

President Obama entered the White House with all good intentions. But, let’s face it, despite the best intentions for Americans, politicians know very little about economics. Case in point: how many billions of dollars of American taxpayer money did the government lose in the Great Economic Bailout of 2008 and 2009?

This past weekend, we heard that giant CIT went bankrupt, with billions of taxpayer money forever gone. Then we have the multi-billion-dollar question that continues to loom: if the government had bailed out Lehman Brothers (like it did Bear Stearns), would the credit crisis have gotten as bad as it did? In other words, if the government had spared Lehman the $20.0 billion it needed to survive, would we have ever needed to commit the trillions of dollars in taxpayer money the government eventually spent to save the economy?

Most history books written in the past two years blame former Fed Chairman Alan Greenspan for the real estate bubble (I’m not tooting my horn, but I was already blaming Greenspan in 2004/2005, long before the **** hit the fan). Had he not brought interest rates down to multi-decade lows in the summer of 2004, the real estate bubble and credit crisis may have never happened.

And poor Ben Bernanke; what choice did he have but to bring interest rates even lower than Greenspan did, to almost zero? And what choice did the government have but to run huge deficits in its effort to save the economy? I’m not blaming the politicians, as the need is to appease the voters today, not tomorrow. What I am saying is that the poor choices our government has made will come back to haunt Americans.

The zero interest rates of today, the unprecedented government bailouts and deficits…what have the politicians done but mortgage our future for today?

I feel sorry for the young people of today, because they are basically inheriting a bankrupt country. Japan spent 20 years running huge deficits and the result today is a country near financial ruin. We need to face the music. America is following ever so closely the steps Japan took to financial meltdown.

How did this all happen? In my belief, the Federal Reserve and the government tried too hard to control the natural forces of economic growth and contraction. The more you try to control a bull market or a bear market, the harder it will eventually hit you in the face.

As this decade comes to a close, the next 10 years look very bleak for the United States. Interest rates at a record low (that have remained too low for too long), huge record annual deficits, a currency under immense pressure to devalue and inflation brewing…add them all up together and the next decade, which starts in only 57 days, could be the worst financial decade since the 1930s.

Michael’s Personal Notes:

A reader wrote in yesterday to ask, “Several months ago, Mr. Lombardi was repeatedly writing that he believed the Dow Jones would eventually re-test its March 2009 lows. I would like to know if he still believes in his not-long-ago conviction.”

The answer is a big YES: There is no doubt in my mind that, once this bear market rally is over, we will retest the March 2009 stock market lows. Just read my above column of today to see why it will happen.


Reuters reported yesterday that the International Monetary Fund sold 200 tons of gold bullion to the Reserve Bank of India for $6.7 billion. With gold trading at a record high yesterday of $1,084 an ounce, who do you think will have eventually gotten the better deal, the IMF or India? My money is on India. And I’m sure gold-hungry China is kicking itself for not getting those 200 tons of yellow.

Where the Market Stands:

Let’s face it. The Dow Jones Industrial Average broke past the
10,000 mark a few weeks back and retail investors hardly noticed. My broker friends tell me that the calls they expected from their clients ready to get back into the stock market never happened. We are sitting with three major group of investors today: Those who sold on the way down to Dow Jones 6,440 on March 9, 2009, and never got back in (the losers), those who bought at the market lows of March (the winners), and those who held all the way down to the market lows and are still holding, waiting to see their stock portfolios get back to the same level of October 2007 (these investors will be losers, too).

Right now, it is obvious that the market is taking a break from the rally in stock prices that started in March. Most of what I read today is that the bear market rally, as it is called, is over. Just remember, the stock market always delivers the opposite of what analysts and investors expect.

The Dow Jones starts this fine morning up 11.3% from where it began 2009.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet that the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression