Why the Markets Don’t Buy Obama’s
Four-trillion Deficit Cut

Yesterday, President Obama said that he would cut $4.0 trillion from annual deficits over the next 12 years. He plans to raise taxes and cut government spending. The stock market hardly budged. The U.S. dollar and U.S. Treasuries hardly moved. You’d think all three would rally on the news of trillions to be cut from our debt. Why aren't the markets reacting?Why don’t the markets believe him?

Yesterday, President Obama said that he would cut $4.0 trillion from annual deficits over the next 12 years. He plans to raise taxes and cut government spending.

The stock market hardly budged. The U.S. dollar and U.S. Treasuries hardly moved. You’d think all three would rally on the news of trillions to be cut from our debt.

Gold, which has been rising in price for the past 10 years as the greenback has declined in value, actually rose in price yesterday. One would think that, on hearing that the government is finally doing something about its debt nightmare, the precious metals would fall in price. The opposite happened.

So why did the markets yawn?

Maybe the markets don’t believe that the Republicans will work with Obama on his proposed $4.0 trillion in deficit cuts, or maybe they feel Obama will not be in power in two years to see them through.

But here’s the real reason we got yawns from the markets yesterday on the proposed trillions of dollars in deficit cuts:

As we all know, the U.S. debt will sit at $14.29 trillion by about May 16, 2011. The Obama Administration predicts that the government will pile on another $3.8 trillion in debt over the next five years (a number I find far too conservative). When you add the two together, we will be sitting on $18.09 trillion in debt by 2016.

We’d surely surpass $20.0 trillion to $21.0 trillion in debt by 2020—150% of GDP in a rising interest rate environment.

But those numbers don’t take into consideration interest rates rising at the pace I believe they will rise, unexpected natural catastrophes, wars, or economic deterioration as opposed to economic growth. Bottom line: the picture could get much worse; maybe downright ugly.

Economic analysis: More people are employed by government in the U.S. today than by the U.S. manufacturing and U.S. construction industry combined. Take a trillion from high-income earners and they will spend less, hurting the economy. Cut expenses by trillions and you will get more unemployment, hurting the economy. It’s one of those “damned if you, damned if don’t” situations, and the markets know it all too well.

Michael’s Personal Notes:

I couldn’t believe Obama’s words yesterday. They are a mimic of what we have been saying here in PROFIT CONFIDENTIAL for two years. In announcing the proposed $4.0 trillion in deficit cuts, the President said:

“If our creditors start worrying that we may be unable to pay back our debts, it could drive up interest rates for everyone who borrows money, making it harder for business to expand and hire.” Obama gets it now, but unfortunately it’s too late.

The amount of government debt piled on by government, the amount of easy money made available to Wall Street and big banks by the Fed, the unprecedented buying of U.S. Treasuries by the Fed—all super inflationary. That’s why gold continues to rally in price and the greenback continues to fall in value.

Where the Market Stands; Where it’s Headed:

The best way to describe the bear market rally: getting tired.

Back in December of 2010, after being bullish on stocks since March of 2009, I changed my tone to say that the bear market rally would continue to take stock prices higher in the immediate term, but, in the short term, stocks were turning bearish. That’s exactly how it’s playing out.

To me, “short term” is six to 12 months. “Immediate” is now. We’ve had a great continued rally in stocks right through to today. If we get a final blow off from stocks, the most I expect is five percent to 10% on the upside from here.

What He Said:

“‘Home sales down 8.4%, could be the bottom,’ read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters—not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.