Stocks & Economy: Contrarian View You Won’t Read Elsewhere

You’ll read a lot today about the Federal Reserve’s statement yesterday that it will buy long-term treasuries in an effort to bring down long-term interest rates. Why Michael thinks this is a counter-productive mistake.No, no, no! They’ve got it all wrong! The actions of the government and the Fed are contra to what the economy needs to get it going! More damage is being caused to the economy than good.

You’ll read a lot today about the Federal Reserve’s statement yesterday that it will buy long-term treasuries in an effort to bring down long-term interest rates. That’s a mistake in my opinion. It’s counter-productive.

Sure, the argument will be that lower long-term interest rates will be good for the real estate market. But we must realize that consumers are not interested in buying homes. The 30-year mortgage rate was already at a 30-year low before yesterday’s announcement and consumers were not buying homes. You can bring long-term interest rates to two percent and consumers will not move to buy houses, because they have no faith that housing will move up in price!

Now look at the repercussions of bringing long-term interest rates down:

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  • Seniors dependent on long-term bond income will have less income, which means they will spend less, actually hurting the economy.
  • The rate of inflation will not outstrip the return on long-term bonds, making the dollar less valuable…any investor buying bonds today is losing the purchasing value of his/her money, as inflation outstrips investment returns.

Many economists said yesterday that the Fed’s attempt to lower long-term interest rates will not provide any significant stimulus. In fact, three Fed officials voted against the move.

You’ll hear news today that the stock market is going down because the Fed indicated yesterday that there is “significant downside risks” to the economy. Stocks are not going down because of this. The market and investors already know the economy is fragile; after all, the stock market is a leading indicator!

The stock market is going down today because the traders need to make money and they make big money on big market shifts. Banks don’t make much money on lending anymore; hence they need to figure out other ways to make money, and day trading is a great way to do it. Remember, big banks like Goldman Sachs make money—big money—on at least 90% of the trading days.

Michael’s Personal Notes:

Is there something wrong with this picture?

The European Union (EU) and the International Money Fund (IMF) will only inject money into Greece if the Greek government meets certain fiscal goals. Fair enough. But the targets are unreasonable; they don’t make sense.

Greece is pledging to reduce its deficit to about 7.5% of its gross domestic product (GDP) this year. To give you an idea of how over the top this is, last year the U.S. deficit was equal to about 11.4% of GDP.

In order to meet the hefty fiscal goals set by the EU and IMF, Greece has accelerated its austerity measures. Just look at some of these new measures:

  • A 20% cut to pensions of more than 1,200 euros a month (so much for a retirement plan)
  • A 40% cut to pensions paid to those younger than 55 for amounts exceeding 1,000 euros
  • A cut to the wages of 30,000 state employees

There will more riots in Greece over these new austerity measures. But what is Greece to do? Lenders are demanding cuts to government spending prior to delivering a much-needed cash injection due to Greece next month.

If we ever pull out from this economic malaise, some of these smaller European countries will come out financially stronger than ever.

Where the Market Stands; Where it’s Headed:

We are in phase II of a bear market, which started in October of 2007. Phase I brought stock prices steeply lower in the period of October 2007 to March 2009. Phase II of the bear market, which we are presently in, brings stock prices back up so that investors are lured back into the stock market under a false sense that the economy has improved or is improving. Since March of 2009, the Dow Jones Industrial Average is up 73%. Phase III of a bear market brings stocks back to the point where the Phase II started (6,440 on the Dow Jones Industrials).

My opinion is that the current Phase II of this bear market—the “rebound rally,” as it’s often referred to—is not over yet. Pessimism prevails, not optimism. Bear market rallies top out on investor optimism—something we don’t have today.

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 were predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.