Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘U.S. debt’

Why Prices Will Rise Exponentially Over the Next 10 Years

By for Profit Confidential

Social Security Health Care Costs Double 2014Something just doesn’t make sense here…

In 2013, the U.S. budget deficit came down to $680 billion. Finally, after four consecutive years of annual budget deficits of more than $1.0 trillion, the government got its annual “hole” under the trillion-dollar level, and it seemed as though we were headed in the right direction.

But stop. The government is now reversing its track…

According to the Congressional Budget Office (CBO), the budget deficit of the U.S. government will decline to $492 billion in 2014, but from then on it will increase and reach more than $1.0 trillion annually again by 2024! The CBO projects that between 2015 and 2024, the accumulated budget deficit for the U.S. government will be $7.6 trillion. (Source: Congressional Budget Office web site, last accessed April 30, 2014.)

The biggest expense increases for the government, Social Security payments are projected to almost double by 2024, and annual healthcare expenses are going to increase from $936 billion in 2014 to $1.7 trillion in 2024.

What this means is that the national debt will rise to $24.0 trillion by 2024 if everything goes as planned—if we don’t have another war between now and then, if we face no natural catastrophes that would require federal support, and if interest rates don’t run up too much (all three of which I believe will happen)!

My personal projection is that 10 years from now, we will be looking at national debt in the $30.0 to $34.0 trillion range. I believe annual budget deficits of more than $1.0 trillion will become the norm, not the exception.

When I look at this and the … Read More

National Debt to Double from $17.0 trillion to $34.0 Trillion?

By for Profit Confidential

national debtCan it be true?

The U.S. Department of the Treasury has reported that for the federal government’s fiscal 2013 year, which ended on September 30, 2013, the U.S. government budget deficit was $680 billion—the smallest budget deficit in five years. (Source: Bureau of the Fiscal Service, October 30, 2013.)

Should this be taken as great news? No, it’s “smoke and mirrors,” as I will explain below. But the mainstream certainly thinks this year’s budge deficit, which came in below $1.0 trillion, is good news. They forget that no matter how you look at it, any budget deficit, no matter how small or large, is adding to a bigger problem at hand—our massive national debt.

Let’s face it: a budget deficit at the end of the day means the government spent more money than it received. Where does this extra money that the government spends come from? The answer is simple: it borrows. And as a result, the national debt rises.

Our national debt has increased significantly over the past few years. At the beginning of 2008, the U.S. national debt stood at $9.2 trillion. Today, it stands above $17.0 trillion. (Source: Treasury Direct web site, last accessed October 31, 2013.) This represents an increase of almost 85% in the national debt in the matter of a few years.

I believe the national debt will double from here…from $17.0 trillion to $34.0 trillion.

Why am I so negative on the national debt? I’m skeptical because I don’t believe this year’s numbers present the real story on government spending. Let me explain…

In the fiscal 2013 year, the U.S. government paid … Read More

U.S. Credit Rating Downgraded to Same Level as Brazil?

By for Profit Confidential

171013_PC_lombardiThe U.S. government, after winning World War II for the Allies, was very convincing. It told central banks around the world that they should hold the U.S. dollar as their reserve currency instead of gold, based on the idea the U.S. dollar would be backed by gold. Only limited amounts of U.S. dollars could be printed, because the currency was tied to gold bullion. Central banks bought into the idea.

Unfortunately, a few decades down the road, the concept of a U.S. dollar backed by gold was thrown out the window (thank you, President Nixon). Eventually we were introduced to the modern day printing press—printing money out of thin air at the will of the Federal Reserve without the U.S. dollar being tied to any “hard” currency like gold.

Why would anyone agree to this horrible idea?

Back in those days, the U.S. economy was prospering. Our government was in good shape and didn’t have much debt. And the logistics made sense, too, as time passed. Why wouldn’t a central bank have in its reserves the currency of the world’s strongest economy and military? Why wouldn’t a central banker keep U.S. dollars in his vault as opposed to hard-to-carry and hard-to-store gold?

Years have passed since the U.S. dollar “unglued” itself from gold. Things have changed, too. America is not so glorious anymore. Ever-rising debt and the never-ending printing of U.S. dollars have resulted in some countries changing their policy on U.S. dollar-backed reserves. And the fundamental factors that keep the U.S. dollar strong are deteriorating quickly.

The balance sheet of the U.S. economy does not look as good as … Read More

Has the Stock Market Gone Mad?

By for Profit Confidential

Has the Stock Market Gone MadThe stock market…a place where rationality has been thrown out the door in favor of trading for immediate profits…profits based on what the government and Federal Reserve are planning to do next. It’s no longer a place for average investors to make money, as the fundamentals that drive key stock indices higher don’t really matter anymore. The notion has become “If it’s good news, buy! And if it’s bad news, then buy even more!”

We have been witnessing this phenomenon on key stock indices for a while now, and from my experience, such erratic behavior by the stock market usually comes at the end of a long up or down cycle.

Congress had decided to “kick the can” of U.S. debt down the road a little longer. When news broke last Thursday that they were planning to increase the U.S. debt limit for a few weeks and then come back to debate it, key stock indices had the best day of the year. Look at the circled area in the chart below:

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Hold on a minute!

Why did the S&P 500 jump so much on the Republicans saying they would put in a temporary new U.S. debt ceiling instead of debating it? Isn’t increasing the U.S. debt load bad? After all, we are the biggest debtor in the global economy.

Dear reader, this is the new norm on key stock indices. The bad news, meaning we will have higher U.S. debt, is taken as good news by key stock indices. And assets that should be increasing in value are actually being punished. Case in point: gold … Read More

Growing American Business Inventories Paint Worrisome Picture

By for Profit Confidential

Growing American Business InventoriesThe biggest economic center in the global economy, the U.S., showed dismal growth in the last quarter of 2012. Sadly, the first quarter of 2013 is looking to be the same. Demand in the country is anemic at best as consumers are struggling.

New durable goods orders in the U.S. economy plunged 5.7% in March—the second decline in the first three months of 2013. (Source: United States Census Bureau, April 24, 2013.) Inventories of manufactured goods have been continuously increasing, seeing an increase in 17 of the last 18 months!

The HSBC Flash Manufacturing Purchasing Managers’ Index (PMI) for China indicated a slowdown in manufacturing output for the second-biggest economy in the global economy. The index plummeted to a two-month low in April, registering 50.5 in April compared to 51.6 in March. (Source: HSBC, April 23, 2013.) Any reading below 50 indicates a contraction in the manufacturing business.

Germany, the fourth-biggest economic hub in the global economy, is seeing its economic slowdown quicken. The Flash Manufacturing PMI for Germany dropped to a four-month low this month. The index stood at 47.9 in April, compared to 49 in March. (Source: Markit Economics, April 2013, 2013.) Yes, the manufacturing sector in Germany is experiencing a contraction. In Germany, exports orders to the global economy in April declined the most in 2013.

The “worsening” statistics I just gave you are of the main economic hubs in the global economy; others are in worse shape. France’s unemployment rate is becoming worrisome, and the country is bordering on a recession. Japan is already back in a recession; Italy is begging for growth.

Dear reader, … Read More

Why a Downgrade in the Credit Rating of U.S. Debt Is Imminent

By for Profit Confidential

A report from Standard & Poor’s (S&P), the credit rating agency, indicates there is more than a one-third chance that Japanese sovereign debt could face a downgrade. The report stated, “…the continuing prospect arises from risks associated with recent government initiatives and uncertainty of their success.” (Source: Janowski, T., “S&P says more than one-third chance of Japan downgrade, cites risks to Abenomics,” Reuters, April 22, 2013.)

In an effort to spur economic growth in the country, the Bank of Japan is printing money “like mad.” But we already know this concept hasn’t worked very well for the Japanese economy in the past. Japan is in an outright recession, with exports in a slump and the value of its currency in a freefall when compared to other major currencies in the global economy.

Why does it really matter to North Americans what happens in Japan? Even though S&P kept the credit rating on Japan’s sovereign debt at AA- (or investment grade), the concern is how vulnerable the U.S. debt really is to its own credit rating downgrade.

Just like the Japanese economy, the Federal Reserve is using quantitative easing to print $85.0 billion a month in new paper money and has thus far increased its balance sheet assets to over $3.0 trillion. Similarly, the U.S. government has been “spending with two hands, while borrowing with a third.” Why? It’s all in the name of economic growth.

As the readers of Profit Confidential know, I have been very critical of quantitative easing. It may have been needed back when the financial system was on the cusp of bankruptcy in 2008. But continuing … Read More

Stock Market Overpriced by 50%?

By for Profit Confidential

Stock Market OverpricedAs the key stock indices approach highs not seen since just before the financial crisis, the underlying fundamentals are screaming “watch out.” The stock market could be edging higher on nothing but false optimism and greed.

The most basic reason for any stock market rally, corporate earnings, is missing from the equation. The bellwether stocks are flashing warning signals. Just as one example, United Parcel Service, Inc (NYSE/UPS) reported lower-than-expected corporate earnings for the fourth quarter of 2012. For the first quarter of 2013, the company expects to earn less than originally anticipated. (Source: Associated Press, January 31, 2013.)

Looking at corporate earnings expectations from a broader viewpoint, they are declining as the key stock indices inch higher. The corporate earnings growth rate for S&P 500 companies in the first quarter of this year was forecast at 5.1% in September of 2012. In December, the forecast declined to a corporate earnings growth of 2.4%. Now, according to FactSet, the corporate earnings growth rate for the first quarter of 2013 stands at -0.04%. (Source: FactSet, February 15, 2013.)

As I have documented in these pages, companies on key stock indices are showing better corporate earnings by cutting costs and buying back shares, as opposed to increasing revenues. In the fourth quarter of 2012, employee compensation (wages) only accounted for 54.7% of U.S. gross domestic product (GDP)—the lowest level since 1955. (Source: Wall Street Journal, February 11, 2013.)

Key stock indices are becoming significantly overpriced. The value of the U.S. stock market stands at about 133% of GDP. The average for the past 60 years has been around 82%. By … Read More

From Motor City to Fresno, Credit Ratings Being Slashed

By for Profit Confidential

The Congressional Budget Office (CBO) expects the U.S. federal government to have a lower budget deficit this year than those of the previous four years—finally getting the annual deficit under $1.0 trillion (although, not by much). But I am skeptical when it comes to the CBO estimates, as financial conditions at the more local level paint anything but a rosy picture.

Our country has already faced one credit rating downgrade and chances are another one is in the making. Why? Cities across the U.S. are in deep trouble, as their massive deficits continue to increase.

Take Detroit, for example. The city is on the verge of bankruptcy again due to the severe downturn in the local economy and the city’s annual deficit. Detroit’s residents are fleeing the city, with the population down 30% since 1990. (Source: Reuters, January 28, 2013.)

Troubles in California persist. Multiple cities in the state have already filed for bankruptcy; others may also follow suit. Fresno, the fifth-largest city in the state, is in financial stress. Fresno’s credit rating has already been downgraded by Moody’s. The credit rating agency notes that the city already has a high deficit, high payrolls, and other fixed costs in the background of a deteriorating economy. (Source: The Sacramento Bee, February 11, 2013.)

Sadly, this doesn’t just end here. Moody’s downgraded 11 municipalities in the U.S. from stable to negative—and all these cities had a credit rating of “AAA” prior to the downgrade. (Source: Barron’s, February 6, 2013.)

It would be good to finally see the federal government get its annual deficit under $1.0 trillion, but issues with cities … Read More

U.S. Bonds Enter the Danger Zone?

By for Profit Confidential

U.S. Bonds EnterU.S. bonds could be entering dangerous territory.

According to Bank of America Merrill Lynch indices, 30-year U.S. bonds have declined more than five percent so far in 2013. Their decline in January 2013 was 4.3%—the biggest monthly decline since March 2012. (Source: Bank of America Merrill Lynch, February 6, 2013.)

The following is a price chart of the 30-year U.S. bonds—almost looks like a free-fall:

$USB 30 Year Treasury Bond Price stock chart

Chart courtesy of www.StockCharts.com

Why are the U.S. bonds prices falling? After all, wasn’t the Fed buying the majority of new U.S. bonds issued, thus pushing down yields? There is no rocket science behind this. The fact of the matter is that U.S. debt has increased significantly over the past four years. Just like you wouldn’t lend money to a person who has lots of debt already and poor job prospects, neither do U.S. bonds holders.

According to the Congressional Budget Office (CBO), the U.S. budget deficit will decrease to $854 billion in the fiscal year of 2013, after it was over $1.0 trillion for the past four years in a row. As the saying goes, “I’ll believe it when I see it.” (The CBO’s numbers do not include any extraordinary events, like interest rates rising, the government having to take a write-down on student loans, natural catastrophes—they left no room for these kinds of events.)

Even if you believe the CBO forecast, this means the “official” U.S. debt will move from its current $16.5 trillion to $17.4 trillion. Looking at U.S. debt in relation to gross domestic product (GDP) paints a worse picture. The $17.4-trillion current U.S. debt would equate to more than 109.3 … Read More

Mining for Riches with Junior Miners

By for Profit Confidential

Mining for Riches with Junior MinersGold and silver are currently taking a breather on the charts, but if the global risk holds, I wouldn’t be surprised to see a rally in the precious metals this year.

I can see gold breaking to $1,800 an ounce, something that nearly materialized on October 5, 2012, when the price of cash gold traded at $1,795.78 prior to slipping. In fact, the previous time the precious metal was trading above $1,800 was on November 8, 2011. We could see a move above, given the eurozone mess, U.S. debt and fiscal cliff, and the mixed results in China.

Silver is holding at around $30.00 an ounce, but I’m not as bullish on the white metal, as the price is largely driven by the direction of the global economy.

I continue to like gold going forward, given the financial crisis in the eurozone; trust me, it is not going to get better anytime soon…it could even take years. Moreover, with a recession holding in the eurozone, the crisis could deepen and impact the global economy.

Across the Pacific, there are some encouraging signs in China; but prolonged weakness in the eurozone and Europe will negatively impact China along with the other Asian countries, like South Korea, Japan, and the smaller emerging Asian markets.

For those of you who took my advice to hold on and accumulate gold on weakness down to $1,600, it has been a nice ride. In my view, major price weakness should be viewed as an opportunity to accumulate the yellow metal in 2013, unless $1,600 can’t hold.

I favor the metal plays and continue to see opportunities, … Read More

High Risk to Start the New Year

By for Profit Confidential

High Risk to Start the New YearHappy New Year to our Profit Confidential readers!

In 2012, small-cap stocks were the second-best performing group, following the technology sector. The Russell 2000 was the top performer in December and has been since the end of the first quarter. How the small-caps fare this year will, again, depend on the global economy.

My stock analysis is that what happens in January will be an important indicator for the year as far as performance. Historical records indicate that stocks have increased an average of 1.6% in January since 1969, according to the Stock Trader’s Almanac. In 2012, January was a strong month, so it was not a surprise to see the relatively good advance in stocks.

As we move into 2013, the focus will be on any remaining fiscal cliff fallout and the impact of the deal, along with the eurozone mess, the U.S. national debt, and jobs growth.

For 2013, my stock analysis is cautious to start the year, based on the high global risk.

The fact that the economy is triggering some jobs growth is encouraging. My analysis is that this will likely continue in 2013, although the unemployment rate is expected to remain relatively high at over seven percent.

My stock analysis tells me that we need to see leadership from such areas as the financial and technology sectors. The big banks were strong in 2012, but we also need to see technology take a leadership role.

It definitely will be a tricky year, given the global and domestic issues, along with suspect earnings and revenue growth to start the first quarter, which you can read … Read More

42 Bankruptcies Later; Pace of Municipality Bankruptcies Increases

By for Profit Confidential

debt crisisI’m worried about U.S. debt (which this morning surpassed $16.3 trillion) and I’m concerned it’s going to increase even further. We all know that, since the financial crisis hit in 2008, U.S. debt has skyrocketed. Now with cities and states across the U.S. struggling with their budget deficit and liabilities, I’m concerned the U.S. government will become the ultimate banker—or, I shall say, bankruptcy trustee—adding more to the U.S. debt in the process.

Cities and states are unable to cope with the budget deficits they have created and are struggling to the point where some have filed for bankruptcy and some are becoming doubtful of their fiscal state. Since 1981, 42 U.S. municipalities have filed for bankruptcy; 10 of them in last four years. (Source: Global Research, July 19, 2012). The cities couldn’t handle their respective budget deficits and were not able to pay their obligations.

On the state front, the Illinois state pension is running out of funds to cover its obligation and the state might need to draw funds from education, infrastructure, and local aid. Illinois is scrambling to deal with $83.0 billion in pension deficits and $8.0 billion in unpaid expenses. (Source: Bloomberg, October 29, 2012.)

With so many cities and states in trouble due to their vast budget deficits, the federal government may need to help them by stepping in and increasing its own budget deficit. Ask yourself this question: the federal government didn’t let too-big-to-fail companies like AIG, Citigroup, and General Motors fail, so won’t it bail out its own cities and states?

Sure, if the fiscal cliff is allowed to happen, personal income taxes … Read More

Why the Election Will Dictate Which Way America Goes

By for Profit Confidential

Why the Election Will Dictate Which Way America GoesOn the eve of the presidential election, the world and America are anxiously waiting to see whether President Obama or Governor Mitt Romney will become the 45th U.S. President.

The outcome of Tuesday night will be critical not only for the direction of the country on both the political and economic front, but also on the direction of foreign policy.

The latest national poll by CNN has the race to the White House at a dead heat, with Obama at 48% and Romney at 47%. In the key Ohio race, support for Obama has fallen from 52% on October 2 to the current 50%, but that two percent could be enough to win back the White House.

At this point, I don’t really care who wins, but something will need to be done about job creation, the $16.2 trillion in U.S. debt, and the pending “fiscal cliff.”

Whether you are a Democrat or a Republican, you know that we need job creation. The October non-farm job creation report showed 171,000 new jobs, which was better than expected; but there is a long way to go, as the job creation reading is too low to drive the unemployment rate down. The unemployment rate is well below the four-percent level in 2006 and 2007.

Obama and Romney have different strategies for lowering the unemployment rate and driving job creation. While Obama wants to extend the Bush-era tax cuts to those making under $250,000 a year, which represents the majority of working Americans, Romney wants the cuts to apply to all income earners. While I’m not here to take a side, the … Read More

How Consumers Are Capping Economic Growth

By for Profit Confidential

market viewWhen consumers are cautious, they tend to hold back on any major purchases, such as homes, vehicles, furniture, appliances and travel, to list a few. This will impact spending and gross domestic product (GDP) growth and the ability of companies to expand their businesses and hire new employees, according to my market view.

Consumer confidence in May was another disappointment, with a reading of 64.9. This was below the estimate of 69.4 and the downwardly revised 68.7 in April. The reading is at a multi-year low. To tell you how bad the readings are: economists suggest a reading of 90 indicates a healthy economy, something that has not happened since December 2007 when the recession began. My market view is that it will be some time until the confidence reading heads back towards the pre-recession reading level of 90. This cannot be good.

And, while home building and permits are much improved, the critical home prices continue to fall, which I discussed in Homebuilders Show Improvement, But Stay Selective. The Case-Shiller 20-city Index contracted another 2.6% in March, following a 3.5% decline in February. Lower home values translate into less home wealth and less desire to spend until the situation improves, based on my market view. A strong housing market is important in many ways; for example, homeowners buy new furnishings, including many big-ticket items. This is not happening; home prices continue to decline, dragged down by continued high foreclosures and short sales where homes are dumped at prices below mortgage value.

My market view is that, to drive the economy, consumers need to spend. We have historically … Read More

Global Economies Backtracking

By for Profit Confidential

economic recoveryThe debt and growth problems in the eurozone continue to dominate the headlines. The eurozone countries are looking at the impact of Greece exiting the 17-country eurozone. Greece can’t even elect a coalition government to deal with the austerity measures.

Now there’s news that the eurozone is continuing to slide. Not really a surprise. The eurozone composite Purchasing Managers’ Index (PMI) contracted to 45.9 in May, the lowest level since June 2009, and below the 46.7 reading in April. It was also the ninth time the PMI was below the neutral 50 level since June 2009. The reading clearly indicates that growth will be challenged.

France is stalling. Germany, the largest and most influential country in Europe, expanded at a muted 0.5% in the first quarter. Moreover, declining inventories suggest less demand for goods. The problem is that the weakened countries of Germany and France are not conducive to economic recovery in the eurozone. You will discover over time that this is true.

My concern is that the fragility of the eurozone impacts the global economies that trade with the region. The 27-nation European Union is clearly feeling the pinch. Britain just entered its second recession since the financial crisis in 2008, impacted by the sluggishness in the eurozone. Britain saw its gross domestic product (GDP) contract 0.3% in the first quarter following a 0.2% decline in the fourth quarter. The country continues to face budgetary concerns and, without higher exports to drive revenue income, Britain will continue to face hardship this year and into 2013.

The European debt crisis and muted growth in the eurozone have also impacted ChinaRead More

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