subject: Don't Be Fooled; the Double Dip Is Coming [print this page] Don't Be Fooled; the Double Dip Is Coming
It was comical this weekend reading reports from various economic commentators arguing their points as to whether we will have a double-dip recession or not.
The economists saying that we have a small chance of a double dip believe that Ben Bernanke and the Fed have done a masterful job at saving the economy from the Great Depression II. The facts are that employment, albeit slowly, is rising. Corporate profits are rising. The stock market has improved substantially since March 2009 and GDP has turned the corner.
The older timers, like me, believe that the double-dip is coming for these reasons:
Interest rates cannot go any lower than they are to "save the economy," because they are at zero. If inflation rises, interest rates will move up, causing damage to a fragile economy.
The U.S. government is now in the insurance business (by saving AIG), in the auto business (by saving General Motors), in the mortgage business (by saving Fannie Mae and Freddie Mac), in the healthcare business (because of the new healthcare reform), and who knows what else. But what the government is really in is "hock." Big time hock! It ran out of money long ago and is living on trillions of borrowed money...and, as I say, borrowed time. Most state governments are already broke.
During the Great Depression, housing prices in the U.S. fell 15% from their peak. Today, housing prices in the U.S. are down 30% from 2005. Banks are repossessing homes daily. About one in four homes in the U.S. with mortgages are in a position where the home is worth less than the mortgage.
Sure, you read a lot about deflation being a problem, but the price of gold bullion since 2003 (up threefold since then) acts as if inflation will be the problem. Inflation results in U.S. dollars being worth less and interest rates rising. If inflation does not arrive, the debt of the U.S. will eventually kill the dollar anyway.
After the stock market crash of 1929, the economy looked like it, too, was recovering in the early 1930s, until the second shoe dropped. Today's government, not wanting to repeat the mistakes of
the early 1930s, dropped interest rates to zero, saved companies it deemed too big to fail, and spent trillions to stimulate the economy.
Now, we are in a position where we have no more bullets to fire. Interest rates cannot fall any further. We are already on track to a $20.0-trillion deficit by the end of this decade. Has all we have done just delayed the enviable?
Get ready for the double dip, my dear reader; it is coming.
Michael's Personal Notes:
Will politicians ever get it right? Or should my question be: will politicians ever treat the spending of taxpayer money as if it were their own?
From June 26 to June 28, 2010, the G20 Summit takes place in Toronto, Canada. Prior to that, from June 25 to 26, the G8 Summit will take place in a small town one hour's drive north of Toronto?
The cost of the summits to Canada? Approximately $1.0 billion. It's ridiculous for a country, in today's economic environment, to spend $1.0 billion of taxpayer money on the summits for these reasons:
World governments have put too much debt on their hands, and national debt has been (and will continue to be) a problem for the financial markets. At a time when unemployment is high and people can't find work, this is a very poor display of government restraint. For Canada, a country that was running a balanced budget, which is now running a big budget deficit, the additional $1.0 billion just adds to the deficit.
Companies around the world have slashed expenses to the bone, having sent good people home because payrolls needed to be cut. Businesses still can't borrow money for expansion like they used to, but governments can spend, spend, spend. Let's face it; if most governments had to abide by the same rules as taxpayers and businesses, they would be broke.
But Canadians are very complacent people. I couldn't find a report in a newspaper or on the Internet about any uproar in Canada about the $1.0-billion cost of the summits.
Where the Market Stands:
The Dow Jones Industrial Average rallied the final couple days of last week, paring the index's loss for 2010 down to 2.1%. Most market analysts changed their tune in May, when the stock market did not continue rallying and saw the right shoulder of a classic head-and-shoulders pattern as a sure thing. This is basically technical talk for, "the top is in."
Not so fast, I say. When you have some many analysts coming out and saying the market top is in, the next direction for the stock market is down; the market usually does the opposite.
What He Said:
"What group of stocks is next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven't seen anything yet in respect to weaker sales." Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.
