Why Economic Contraction Lies Ahead for the U.S.

The slowing global economy will take a heavy toll on an already struggling U.S. economy. Why? Because a significant number of U.S. companies operate globally. If there is an economic slowdown in the global economy, then these companies will see their profitability shrink.

And demand in the global economy is definitely slowing. Take a look at the chart of the S&P GSCI Commodity Index below. This index tracks the performance of 24 different commodities over time.

$GNX S&P GSCI Commodity Spot Price stock chart

Chart courtesy of www.StockCharts.com


Unfortunately, nine of the 24 commodities making up the S&P GSCI Commodity Index are in a bear market—they have declined more than 20% from their highs. (Source: Bloomberg, April 2, 2013.) The index itself has been in decline since mid-September of last year.

To add to the misery, since July of 2012, the International Monetary Fund (IMF) has slashed its estimates for economic growth in the global economy three times.

Major economic hubs in the global economy are also struggling; they are begging for growth. In 2013, China is expected to post its slowest growth rate in years. Germany and France, two key economic hubs in the eurozone, are struggling to keep up with economic pressures faced by other countries in the region. In Cyprus, if you have more than 100,000 euros in the bank, the government is basically stealing a good chunk of it. Japan is in an outright recession. Emerging markets, like Brazil, are in hardships due to declining exports.

According to the IMF, Canada, one of the largest trading partners to the U.S. economy, is expected to grow at a rate of only 1.8% this year. In 2011, Canada’s economy grew at a pace of 2.6%.

Dear reader, what’s happening in the rest of the world leaves the U.S. economy vulnerable. We haven’t seen any real economic growth since the financial crisis. Now, with threats from the global economy emerging, the growth outlook appears even more dismal.

Today’s rising stock market doesn’t equal economic growth. And that’s why investors should be very careful about higher stock prices.

Where the Market Stands; Where It’s Headed:

My eight reasons why I believe the stock market is at or close to a top:

1. Corporate insiders are dumping stock.

2. Bullishness amongst stock advisors is at a multi-month high.

3. Companies are propping up earnings with record stock buyback programs.

4. Corporate earnings growth will be negative again in the first quarter of 2013.

5. The global economy is slowing. Certain countries in the eurozone are in a depression. The U.S. economy could be contracting.

6. The percentage of assets that mutual funds have invested in the stock market is near a multiyear high.

7. The underemployment rate (which is the unemployment rate taking into consideration people who have stopped looking for work and people who have part-time jobs but want full-time jobs) is over 14%—it really hasn’t changed much in months.

8. The American consumer is in trouble. Real disposable income is lower today than it was in 2008. The personal savings rate has fallen more than 70% since 1980. Average hourly earnings of production and non-supervisory employees have crashed 50% since 2008. (Source for all date in list: Federal Reserve Bank of St. Louis.)

What do we really have? We have a stock market bubble created by the “too easy” money polices of the Federal Reserve—policies of multiyear artificially low interest rates and $2.5 trillion in newly created (printed) money.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in Profit Confidential, June 2, 2005. Michael recommended Google as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold because he saw gold as a much better investment at that time.