Why We Are Still Years Away From an Economic Recovery

by Michael Lombardi, CFP, MBA

While the mood of consumers and investors is improving, the damage to the economy caused by the credit crisis will take years to repair itself. At this point, one can confidently say this is the worse recession we’ve had since the Great Depression.

A good number of my personal friends have lost their jobs. Many business owners I know have closed their doors. Businesses asking landlords for rent reductions have become the norm these days. Employees have taken pay cuts or reduced work hours.

One day the news tells us GM is filing for bankruptcy; the next day we hear the government and unions will end up owning GM. Two more banks were shut down by U.S. regulators last Friday, bringing the total number of U.S. banks that have failed in 2009 to 27 — more than in all of 2008.

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I vividly remember the recession of the early 1980s. Yes, businesses were closing their doors back then, too. But the problem in the early 1980s was high interest rates. A business that bought a building and had a mortgage was paying interest rates in excess of 15%. It was common sense to assume that, once interest rates started coming down, the economy would improve. And that’s exactly what happened.

Today, interest rates are at their lowest possible level. (I read an interesting story this morning that suggested the Fed should go negative with interest rates — almost like paying people to borrow money.)

There are many challenges facing this economy going forward. Eventually, interest rates will need to go up to counter the inflation created by the fast-expanding money supply and the downward pressure on the U.S. dollar. How does an economy get better on rising interest rates? I’ve never seen it happen before.

Regardless, the Dow Jones Industrial Average merrily sits at 8,016 today, which is over 30 times earnings. Yes, 30 times earnings. (Would you risk $30.00 to get back earnings of $1.00?) I can hardly call big-cap stocks a bargain. Maybe the stock market knows something we don’t? Yes, it does. It’s a called a big bad bear trap tailor made for big-cap stocks.

Michael’s Personal Notes:

China reported last week that it has been increasing its gold reserves since 2003. China now has gold reserves of 1,054 tons, which equates to about $30.0 billion at today’s gold prices. While other countries were selling their gold, China was secretly buying. This may have been the worst-kept secret in the gold investment community. Personally, I feel that China is worried about the strength of the U.S. dollar against other world currencies, and China has been increasing its gold reserves as hedge against a possible U.S. dollar collapse. A very smart move for China.

Where the Market Stands:

All the talk about the Swine Flu and the stock market continues to hold its own. The Dow Jones Industrial Average is down 8.7% for 2009. Travel-related stocks have been taking on the chin, while pharmaceutical stocks have been rising. There’s more talk today about the market having made its lows for the year in March and less talk about the stock market retesting its lows. This makes me nervous, as the market always delivers the opposite of what is expected.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good “for sale” sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00 an ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi, PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.