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

U.S. Bonds

The U.S. Treasury department issues debt obligations, including long-term bonds. U.S. bonds range in length, from short-term to very long-term. U.S. bonds are debt obligations by the government. The government issues U.S. bonds for current spending needs, with the intention to pay back the total plus interest over the life of the debt instrument. U.S. bonds are quite important as many other interest bearing securities are priced off this heavily traded security. Since many investors around the world watch the rates of U.S. bonds for signs of economic strength or weakness, it is important for all investors to be aware of the interest rate environment.

Why We Are Closer to a Recession in 2014 Than You Think

By for Profit Confidential

U.S. Economy to Fall into a Recession This QuarterDon’t buy into the notion that there’s economic growth in America!

We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)

As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.

Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)

And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.

The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.

But since 2014 began, and the Federal Reserve actually started to taper, the yield on the long-term 30-year U.S. bond has declined more than 12%.

 30 Year t Bond Yield Chart

Chart courtesy of www.StockCharts.com

If the Fed is pulling back on printing (it has said it wants to be out of the money printing business by the end of this year), why are bond yields declining?

From a fundamental point of view, it suggests the market anticipates very slow growth for the U.S. economy ahead.

Dear reader, the perfect … Read More

What a Loan Officer Would Say to the U.S. Government

By for Profit Confidential

Does the Size of Our National Debt Really Matter AnymoreFor a moment, consider yourself a loan officer at a major bank. Would you approve a loan for a customer who says they earn $1,000 a month, spend $1,300 a month, and don’t have a job? They also tell you they have unpaid debts of $17,000.

I don’t think anyone would authorize that kind of loan because the chances of getting the money back are next to zero. The individual spending more than he earns is a prime example of a financial disaster waiting to happen. It is unsustainable living; when someone does this, they break the most basic principles of Personal Finance 101.

So why does the U.S. government get away with it?

The United States Department of the Treasury, Bureau of the Fiscal Service reported the budget deficit for the month of February was $194 billion. The U.S. government received $144 billion in revenues and spent $338 billion; the government spent 134% more than what it earned. (Source: Bureau of the Fiscal Service, March 14, 2014.)

So far for fiscal year 2014 (which began in October of 2013), the U.S. government has incurred a budget deficit of $380 billion on revenues of $1.10 trillion and expenses of $1.48 trillion. Since the beginning of its current fiscal year, the government has been spending 34% more than what it takes in.

The U.S. national debt, which has now surpassed $17.0 trillion, has skyrocketed since the Credit Crisis of 2008.

There are two important facts about our rising national debt that don’t get a lot of mainstream attention (and I certainly don’t hear the politicians talking about them):

Point #1: … Read More

Why I Fell Asleep Last Night During the State of the Union

By for Profit Confidential

The Borrower of Last ResortLast night started out like every other State of the Union address I’ve seen…

The President told us all the good stuff about the U.S. economy, like how American corporate profits are at a record high, how the stock market is at record highs, how millions of new jobs have been created since the Credit Crisis of 2008, how the housing market is turning around, and on and on.

Like a good old politician, Obama spun the facts to give the viewer the impression his Administration has done a great job at turning the U.S. economy around.

What Obama, who now has a very low 43% job approval rating (Source: CNN Breaking News alert, January 28, 2014.), didn’t say about the U.S. economy—and which no other politician likely would—is that:

None of his 2013 State of the Union “priorities” made it through Congress.

American corporations ended 2013 with the slowest earnings growth rate since 2009.

The stock market has become a Federal Reserve-induced bubble.

The majority of jobs created in the U.S. economy since the Credit Crisis have been in the low-paying sectors of the retail and service (restaurant) sectors.

A record 47.41 million Americans, or 23.05 million households, in the U.S. economy are using some form of food stamps (Source: United States Department of Agriculture, January 10, 2014.)

The number of first-time home buyers in the housing market is going the wrong way. In December, first-time home buyers accounted for a near-record low of only 27% of all the existing-home sales transactions. (Source: National Association of Realtors, January 23, 2014.)

Midway through the speech, I nodded off. I … Read More

Burning Money at the Rate of $113 Billion a Month; How Can They Stop Printing?

By for Profit Confidential

Why Our National Debt Will Double in the Years AheadIn the month of November, the U.S. government registered a budget deficit of $135 billion. Over the course of the month, it spent $318 billion and only took in $182 billion. So far for the fiscal year 2014, which began in October, the U.S. government has registered a budget deficit of $227 billion; that’s an average of $113.5 billion a month so far this fiscal year. (Source: Department of the Treasury; Bureau of Fiscal Service, December 11, 2013.)

In the same period a year ago (October and November of 2013), the U.S. government registered a budget deficit of almost $300 billion. (I ‘m certain that some politician comparing the two periods will say, “Look, our budget deficit situation is getting better!”)

Whenever the U.S. government registers a budget deficit, it has to go out to the market and borrow money to pay for its expenses and obligations. This increases our national debt, which has skyrocketed over the past few years due to consecutive years of extremely large budget deficits. As of December 10, our national debt stood at $17.2 trillion. (Source: Treasury Direct web site, last accessed December 12, 2013.)

I believe our national debt will double to $34.0 trillion in the years ahead.

Here’s my reasoning:

According to the Congressional Budget Office’s projection, between 2014 and 2018, the total U.S. budget deficit of the U.S. government will add up to about $2.4 trillion. This means that by the government’s own estimates, the national debt will hit about $20.0 trillion in four years. (Source: The Congressional Budget Office, May 2013.)

But I think the budget deficits the U.S. government will … Read More

Why the Federal Reserve Can’t Stop Printing

By for Profit Confidential

The strong jobs market report last week started the chatter again that the Federal Reserve would start to reduce the pace of its quantitative easing program. Some have said the Fed will reduce the amount of its asset purchases as early as December, while others are saying the quantitative easing will start to diminish by March 2014.

I have a different opinion: I believe the Federal Reserve can’t stop quantitative easing, because the market has become so dependent on it. If the Fed does go ahead with a pullback on money printing, the consequences will not be pleasant.

I made a very similar prediction last time when we heard a significant amount of “noise” about the Federal Reserve pulling back on its asset purchases. My predictions were right, and nothing has changed since then. The Federal Reserve continues to buy $85.0 billion worth of U.S. bonds and mortgage-backed securities (MBS) a month.

Please see the chart below to see why I believe the Federal Reserve just can’t walk away from quantitative easing without causing massive damage.

TYX 30-Year T-Bond Yield Chart

Chart courtesy of www.StockCharts.com

In May, when the Federal Reserve hinted it might be reducing the pace of its asset purchases, we saw a spike in bond yields with the 30-year U.S. Treasury rising from about 2.8% to as high as 3.9% in a very short period of time. Then we heard the Fed would not be tapering as was expected and bond yields settled and started trading in a range. Now, with the jobs market report perceived as good (first time we created over 200,000 new jobs in months), bond yields started rising … Read More

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The Great Crash of 2014

A stock market crash bigger than what happened in 2008 and early 2009 is headed our way.

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