This Banker Speaks the Truth of Where the Economy’s Headed

by Michael Lombardi, CFP, MBA

My loyal readers are familiar with my distaste for former Fed chairman Alan Greenspan. The Fed, under Greenspan’s regime, created many of the bubbles that burst, spawning the economic mess we face today. I was adamantly against Greenspan bringing interest rates so low in the summer of 2004; I believe it fueled the final speculation in the housing market.

However, I’m an admirer of the current Fed boss Ben Bernanke and his efforts to keep us out of deflation. Most of you know Bernanke has studied the Great Depression and is likely taking whatever steps he thinks will place the economy back on track. I also like Bernanke’s candor.

Specifically, yesterday, in statements to the House Budget Committee, Bernanke clearly warned that continued budget deficits will threaten the economy. Bernanke wants fiscal balance restored.

The budget deficit this year (what the government pays out less what it takes in) will be an astounding $1.85 trillion. This means that every single passing day the U.S. government is spending $5.0 billion more than what it takes in. This situation is why the Chinese are upset with us (they hold about $1.0 trillion of our bonds) and why long-term U.S. T-bills are seeing interest rates on the rise.

Bernanke made it clear yesterday: “Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation.” I couldn’t agree with him more.

Consumers are paying today for their excesses from earlier this decade. Eventually, the government will have to pay for its excesses. However, in the case of the government, this “payment” will result in sharply higher interest rates, tax increases, and a collapsing dollar.

Is it any wonder that I believe the March 9, 2009, stock market lows will eventually be violated?

Michael’s Personal Notes:

Can you imagine spending more than what you make, day in and day out, for years? This is basically what is going on today in Washington. Five billion dollars more going out than what is coming in every day is truly frightening for my children and their children. At one point, the budget deficit will need to come under control or the viability of our currency, and the economy, will come into jeopardy. I don’t want to pay higher taxes. And I don’t want to see interest rates go up either. But I do believe in cutting expenses when necessary.

Where the Market Stands:

The Dow Jones Industrial Average tinkers in and out of being positive for 2009. What we need is a true break out to positive territory for the year. That will bring more investors back into the market, send the shorts covering, and achieve the bear market’s goal: Get investors feeling good before the March 9, 2009, lows are retested. I continue to believe that this bear market rally still has legs.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. That devastation to the economy started happening the first quarter of 2008.