Why Bailouts Will Not Stop the Next Leg of this Bear Market

by Michael Lombardi, CFP

You can say it got under my skin.

I’m talking about that news report yesterday, which said that the U.S. and Canadian governments are not likely to recover much from the billions in loans they gave to Chrysler as a result of the company’s bankruptcy. I was against the U.S. and Canadian governments handing out money to Chrysler and General Motors in the first place.

After all, whose money is it anyway?

I understand the government is trying its best to jump-start this economy in these unprecedented times. We work hard, pay our taxes and entrust that money to the government. But giving taxpayer money to struggling companies that have been mismanaged is not something I signed up for.

The news this morning is that Bank of America is in need of $34.0 billion in new capital to meet the government stress tests. Of course, the preference is for Bank of America and other banks in need of money to raise it in the public markets. But given the state of the economy, raising $34.0 billion will be no easy feat. My hope is that, whatever the situation, the money doesn’t come from taxpayers.

The current Administration and Ben Bernanke’s team are pulling out all the stops to ensure that the economic situation doesn’t get worse. I applaud their efforts when it comes to fiscal and monetary stimulus. But enough with using public money to bail out mismanaged companies.

My concerns going forward are that: interest rates cannot go any lower than they are; the money supply (I believe) cannot be expanding any faster than it is presently expanding; government bailouts and promises during this crisis ($13.0 billion so far) are at dangerous levels; and the U.S. dollar is under immense pressure against other world currencies because of our debt level.

What happens when the next leg of this bear market falls? Simply, there will be very little in monetary and fiscal stimulus left to resuscitate the economy. This is my greatest fear going forward. As I have said all along, all the government efforts will not be able to stop the natural forces of a bear market.

Michael’s Personal Notes:

Last night, I attended a dinner and “Brunello” wine tasting (Brunello di Montalcino is my favorite wine). Looking around, I thought, “What recession?” The place was packed. Not one empty seat. The restaurant even flew in the family that makes the wine we were drinking from Italy. It’s very obvious the rising stock market is making people feel good again and the purse strings are starting to get loose again. Let’s see how long it lasts.

Where the Market Stands:

Almost there. The Dow Jones Industrial Average is now only 4.2% away from breaking even for 2009. The S&P 500 is actually up for the year. I’ve been saying for weeks that I expected the major markets to recoup their 2009 losses and then some. It will be interesting to see just how high the market goes and how many investors are sucked into buying big-cap stocks in the belief that the stock market and the economy have turned around. At 33 times earnings, the Dow Jones is getting very pricey again.

What He Said:

“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else. Why Bailouts Will Not Stop the Next Leg of this
Bear Market
by Michael Lombardi, CFP

You can say it got under my skin.

I’m talking about that news report yesterday, which said that the U.S. and Canadian governments are not likely to recover much from the billions in loans they gave to Chrysler as a result of the company’s bankruptcy. I was against the U.S. and Canadian governments handing out money to Chrysler and General Motors in the first place.

After all, whose money is it anyway?

I understand the government is trying its best to jump-start this economy in these unprecedented times. We work hard, pay our taxes and entrust that money to the government. But giving taxpayer money to struggling companies that have been mismanaged is not something I signed up for.

The news this morning is that Bank of America is in need of $34.0 billion in new capital to meet the government stress tests. Of course, the preference is for Bank of America and other banks in need of money to raise it in the public markets. But given the state of the economy, raising $34.0 billion will be no easy feat. My hope is that, whatever the situation, the money doesn’t come from taxpayers.

The current Administration and Ben Bernanke’s team are pulling out all the stops to ensure that the economic situation doesn’t get worse. I applaud their efforts when it comes to fiscal and monetary stimulus. But enough with using public money to bail out mismanaged companies.

My concerns going forward are that: interest rates cannot go any lower than they are; the money supply (I believe) cannot be expanding any faster than it is presently expanding; government bailouts and promises during this crisis ($13.0 billion so far) are at dangerous levels; and the U.S. dollar is under immense pressure against other world currencies because of our debt level.

What happens when the next leg of this bear market falls? Simply, there will be very little in monetary and fiscal stimulus left to resuscitate the economy. This is my greatest fear going forward. As I have said all along, all the government efforts will not be able to stop the natural forces of a bear market.

Michael’s Personal Notes:

Last night, I attended a dinner and “Brunello” wine tasting (Brunello di Montalcino is my favorite wine). Looking around, I thought, “What recession?” The place was packed. Not one empty seat. The restaurant even flew in the family that makes the wine we were drinking from Italy. It’s very obvious the rising stock market is making people feel good again and the purse strings are starting to get loose again. Let’s see how long it lasts.

Where the Market Stands:

Almost there. The Dow Jones Industrial Average is now only 4.2% away from breaking even for 2009. The S&P 500 is actually up for the year. I’ve been saying for weeks that I expected the major markets to recoup their 2009 losses and then some. It will be interesting to see just how high the market goes and how many investors are sucked into buying big-cap stocks in the belief that the stock market and the economy have turned around. At 33 times earnings, the Dow Jones is getting very pricey again.

What He Said:

“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.