The Million-Dollar Question About the Economy

by Michael Lombardi, CFP, MBA

Lots of big-name money people now saying that the worst isbehind us for the economy:

Billionaire investor Warren Buffett came out this week with comments like “we’ve stopped going down” and we’ve “hit a plateau at the bottom” during an interview on CNBC on Wednesday. Buffett, who is turning bullish on the economy, doesn’t expect a double-dip recession.

Buffett’s own business is benefiting from an improving economy. Berkshire Hathaway posted a profit of $3.3 billion for its three-month period ended June 30, 2009 — halting six consecutive quarters of declining profits at Berkshire.

Federal Reserve Chairman Ben Bernanke said earlier in the week that, “from a technical perspective the recession is very likely over at this point,” while responding to questions at the Brookings Institute in Washington.

And then we have San Francisco Fed President Janet Yellen saying that the recession likely ended this summer and that the economy will likely expand in the second half of this year.

The numbers being released also point a very positive picture on the economy:

  • U.S. manufacturing expanded in August for the first
    time in 19 months;
  • U.S. retail sales surged in August by 2.7%, the most
    in three years thanks to the government’s “cash
    for clunkers” program.

And talking to my friends and associates who own businesses, I can sense that business in general is genuinely picking up. Yes, retail and construction are still difficult industries, but other sectors are starting to see demand rise.

But here is the million-dollar question about the economy: How does the Fed raise interest rates without causing a double-dip recession? This is a very difficult question to answer. At some point ahead, the interest rates we have today that are artificially low will cause inflation to rise and business to boom again. Before that happens, interest rates will need to rise or we will be set up for another boom-bust.

A group of economists are calling for at least a quarter-point increase in interest rates before the year is out, and I’m in that group. But a quarter-point increase this year, a half-point increase next year and another half-point increase in 2011 may not be enough to curb inflation and halt the fall in the value of the U.S. dollar (now at a record 2009 low against the Euro).

Yes, the economy is getting better. But, at some point ahead, interest rates will need to go back up again and I’m not so sure that the economy can weather higher interest rates. That double-dip recession concept, maybe Buffett shouldn’t be so quick to rule it out.

Michael’s Personal Notes:

Earlier this week, we sent an e-mail to our PROFIT CONFIDENTIAL readers about our new “100% Letter.” So far in 2009, our various editors have picked 27 stocks that have risen 100% or more in value. Obviously, this is a record we are extremely proud of. The concept behind the “100% Letter” is simple: each Tuesday, we publish a letter that contains the stocks that our top stock market analysts believe will be our next 100% winners. In case you didn’t get last week’s e-mail about our ingenious “100% Letter,” we will be sending out a second reminder e-mail tomorrow. Please look for it. All our PROFIT CONFIDENTIAL readers should be getting the “100% Letter.”

Where the Market Stands:

Getting closer every day. The Dow Jones Industrial Average now sits a paltry 216 points away from breaking the 10,000 level. The mood among investors and analysts (even though retail investors have yet to return to the market) is turning more positive each passing day. Instead of giving us more of the same for September and October (historically the worst months for the stock market), the market is doing the opposite this year. For 2009, the Dow Jones is now up 11.5%. Sure does beat being invested in T-bills, which is where most investors parked their cash over the past several months.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.