Dear reader, the sad truth is that while the media and government have been pumping us with good news about the recovering economy, we are inching closer and closer to falling back into recession.
If we look at Europe, analysts have cut corporate earnings forecasts by the most in two years. Inflation in the U.K. is running at 4.5% with core inflation running at the fastest pace in 14 years. But the economy in the U.K grew at only half-of-one percent in the first quarter.
Yesterday, the U.S. dollar rallied as concerns over European sovereign-debt issues arose again, especially for Greece. On Tuesday, Germany—what I call the “sole engine of Europe”—saw yields on its 10-year government bonds collapse to a four-month low. Why? Consumer confidence in Germany is now on the decline.
Back at home, the markets are ever so concerned with what will happen after the Fed’s QE2 ends in June. Short-term interest rates cannot rise, as our economy is so delicate it simply can’t deal with higher rates. Meanwhile, long-term interest rates have risen.
The housing market is a “damned if you, damned if you don’t” situation. After a 25- to 30-year down cycle in long-term interest rates, rising rates will negatively impact housing and construction (a true backbone of America) for many years. If we fall back into deflation, collapsing interest rates will not help housing.
Then, of course, we have the issue of too much debt in America. We are approaching a point where our debt-to-GDP ratio is close to what it was just after World War II. But after World War II, we had a great industrial revolution. What do we have today? The Internet and Hollywood?
After decades of leveraging up, no matter how much the government and Fed ease and support monetary system, the fact must be faced we have entered a future of deleveraging the excesses of the past.
Mervyn King, the Bank of England Governor, was quoted last Wednesday as saying his country faces “difficult times ahead…not just one year, but several years.” The sad truth is that his words can apply ever so dearly to us in here in America.
Michael’s Personal Notes:
In the early 1980s, IBM was deeply involved in the manufacturing of personal computers. It was in the hardware business back then. But IBM needed an operating system for its personal computers to work on. The rest is history. IBM hired Microsoft to put operating systems in its PC. A young Bill Gates eventually proved software is more valuable than hardware.
This week, for the first time in 15 years, the market capitalization of IBM, whose stock has been booming, surpassed the market capitalization of Microsoft, whose stock has been lagging. It took IBM 15 years to become more valuable than its one-time supplier.
The business lesson here? There is no force greater than an idea whose time has come. We can see this in these technology companies: Amazon, e-Bay, Apple, Facebook and now LinkedIn.
The life lesson? Aside from being in the right place at the right time, hard-working young people will never cease to amaze.
Where the Market Stands; Where it’s Headed:
Very surprised to see the number of stock advisors who have left the “bullish camp” and have moved into the “correction camp” (I follow the Investors Intelligence Advisor Sentiment gauge). Since the majority of advisors are usually wrong, I see the recent weakness in the bear-market rally simply as that: weakness in an aging bear market.
The Dow Jones Industrial Average opens this morning up a shrinking 6.7% for 2011. While I’m short- and long-term bearish on stocks, I believe the bear-market rally that started in March of 2009 has more life left.
What He Said:
“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Michael has been a “bull” on gold since 2002 and has been recommending gold investments since.