Surprise, surprise, surprise…
The Commerce Department reported yesterday that the U.S. economy grew (i.e. GDP) at only 1.8% in the first quarter of 2011—below analyst expectations. On Wednesday, the Federal Reserve said that it expects GDP to be 3.1% this year.
Separately, the U.S. Labor Department reported an unexpected weekly jump in jobless claims to a three-month high. Jobless claims in the U.S. rose by 25,000 to 429,000 for the week ended April 23, 2011.
Dear reader, this is what you need to know:
The real estate crash that started in 2006 took down the mortgage market and created the credit crisis, which delivered to us the worst recession since the Great Depression. (I remind my readers that, back in 2006/2007, then Fed Chairman Greenspan said that the softness in the housing market would be isolated.)
Under the direction of current Fed Chairman Ben Bernanke (who I believe to be the best Fed chief we’ve had in decades), the Fed pulled out all the stops to save the economy from another depression. The government also chipped-in, basically saving Wall Street.
With so much monetary and fiscal stimulus in the economy, it was a given that we would bounce back from the depths of the recession. But the actions of corporations, in either their bankruptcy or their quest to be profitable again, created severe unemployment issues that will not go away anytime soon.
The government’s actions of saving banks, insurance companies, car companies and more caused our national debt to boom…another consequence of the Great Recession that will not go away.
Then we have the Federal Reserve keeping short-term interest rates near zero and flooding the system with dollars—the effects of which will be a devaluing dollar and inflation.
The cracks in the U.S. economy are starting to slowly show. We can’t have a government/Fed-induced recovery, as it will not be long-term, but only temporary in nature. The economy cannot repair itself without the housing market and without jobs from the manufacturing sector—both of which will not recover for years to come.
Everything is limited in time and money. So just ask yourself this question: How long can the government/Fed duo continue to create debt and issue dollars before the tools used to fend the recession become a liability in themselves?
Michael’s Personal Notes:
What the Fed really said…
I’m sure by now you’ve heard about Fed Chairman Ben Bernanke’s first press conference following a Fed policy meeting this past Wednesday.
Bernanke said that the end of the Fed’s $600-billion bond-buying program will be in June, the termination of which should not have a “significant” effect on the financial markets. I read this as saying that the Fed expects some impact from the end of QE3, but no real market damage.
As I expected, the Fed said that it will continue to roll-over all the securities it bought during and after the credit crisis. All those U.S. Treasuries and mortgage-backed securities the Fed bought…they’ll just remain on the Fed’s books for now. Hence, a chunk of government debt has been taken off the table.
Now that the Fed has promised to end QE2 on time, it will be difficult for the Fed to start QE3 as the economy worsens when the credibility of the Federal Reserve will come into question with investors. I just think the Fed will find another way, or another name, for buying U.S. debt.
Where I strongly disagree with Bernanke is on inflation. Bernanke says that the jump in fuel and food costs will have only a “passing” inflation impact. I beg to differ. The record amount of money pumped into the system during the credit crisis, the unprecedented measures of the Fed in buying so many securities, are all very inflationary. At least that’s what the rise in gold prices has been telling us.
Where the Market Stands; Where it’s Headed:
Wow! What a great first four months of 2011 it has been for stocks!
But the bear market, having finished its 26th month of moving stock prices higher and sucking investors back into the market, is getting very tired. The market will be very hard-pressed to repeat its January to April 2011 performance.
I still see us in a bear market rally. However, the life of that rally is limited now.
What He Said:
“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007 Michael was preparing his readers for worse times ahead.