April 2012 - Forecasts & Trends

Forecasts & Trends is much more than just investment blog posts. You need to know the "big picture;" you need to have a "world view," especially in the post-911 world; and you need more information than ever before to be successful in meeting your financial goals. Gary intends to help you do just that.

Forecasts & Trends

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  • Is The Economic Recovery Stalling?

    Economic reports in recent weeks have been disappointing overall, and there are growing concerns that the economic recovery may be slowing following 3% GDP growth in the 4Q of last year. Thus, all eyes will be focused on this Friday’s first report on 1Q GDP. Only a month or so ago, some worried that the 1Q GDP number could come in below 2% due to the slowdown in inventory rebuilding this year. But as you’ll read below, most pre-report estimates for 1Q GDP are north of 2%.

    Whatever the GDP number is on Friday, there is a feeling that the economic recovery is stalling a bit. Some of the same spoilers that interrupted the recovery in 2010 and 2011 have emerged again this year, raising fears that the winter’s economic strength might dissipate in the spring and summer.

    In addition, the Fed Open Market Committee is meeting today and tomorrow. Since we won’t see the policy statement from the meeting until tomorrow, we can only speculate as to whether the Fed discussed any new stimulus at this meeting. I still don't believe that QE3 is off the table. I’ll give you my thoughts below.

    Finally, a record 5.4 million workers and their dependents have signed up to collect federal disability checks since President Obama took office. Many unemployed apply for disability benefits as soon as their unemployment benefits run out. There are now a record 10.8 million Americans on disability. This is a real travesty on so many levels!

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  • European Debt Crisis Never Went Away

    Since December, the European Central Bank has loaned over 1 trillion euros to banks in southern Europe. These were three-year loans with an interest rate of only 1%. The banks used most of this money to buy up sovereign bonds of their home countries. This served to drive down bond yields around the region, and most observers assumed that the European debt crisis had been solved - at least for a while.

    Yet over the last few weeks, the unexpected has happened: bond rates in countries like Spain and Italy have started to rise again to dangerously high levels. Ten-year Spanish bond yields climbed to the highest level since the ECB started allocating three-year loans in December. Yields rose above 6% last Friday and yesterday, which sparked new concerns that Spain may need yet another ECB bailout. Making matters worse, Spain's economy slipped back into recession in the 1Q.

    Interest rates are also rising in Italy, and its economy appears to have dipped into a recession as well. All of this news has accelerated concerns that the financial crisis in Europe is back. Yet I argue today that the debt crisis never went away! Don't be surprised if this problem returns to center stage over the weeks just ahead, and if it does, this will not be good news for equity markets around the world.

    While US stocks are enjoying a very strong day today, there's a critical government bond auction in Spain on Thursday; Italy has a big bond auction on April 27; and Spain has another large bond auction on May 3. If interest rates continue to rise and/or if Spain and Italy have trouble finding enough buyers, this will be bad news. That's our topic for today.

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  • Will Baby Boomers Wreck the Market? (The Sequel)

    Almost six years ago, I wrote an article about whether the Baby Boomers would crash the stock market when they retired. That dated article is still among the most viewed by visitors on our website even though a lot has happened in the financial world since it was written.

    The premise is that as Baby Boomers retire, they will cash in stocks in favor of lower-risk investments, thus tanking the stock markets. In my earlier E-Letter, I analyzed this claim and concluded that retiring Baby Boomers were not likely to negatively affect the stock markets in a major way for a variety of reasons.

    However, since writing that article in August of 2006 we've experienced a global financial crisis and major bear market in stocks. Would my advice be the same today?

    Because of the popularity of this topic, I am going to revisit the idea that retiring Baby Boomers may crash the stock market. Now that the oldest Boomers are actually retiring, it will be interesting to see if the answer is any clearer now than in 2006.

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  • Our National Debt Is Scarier Than You Think

    Our national debt has now reached a record $15.6 trillion, thus eclipsing our gross domestic product of $15.1 trillion. Of this $15.6 trillion in debt, $10.8 trillion is held by the public (including investors, the Fed, state and local governments and foreigners), and the remaining $4.8 trillion is held by various government agencies and trust funds (including Social Security).

    Our national debt consists of Treasury securities ranging from 30-day T-bills to 30-year T-bonds. Surprisingly, the average interest rate on our national debt is now down to only 2.2%. The average maturity on our national debt is only 62.8 months. What this means is that 71% of our privately-held Treasury debt must be rolled over in the next five years. The US now surpasses Greece, Portugal and Spain when it comes to relying on short-term borrowing to finance our national debt.

    The question is, will there be ample buyers to roll over all this debt in the next five years? This may shock you but the Federal Reserve bought up 61% of all net Treasury issues in 2011. This makes the Fed the largest buyer of US Treasury securities! What happens when the Fed has to stop this practice? Higher interest rates come to mind, especially when you consider that foreign buyers of our debt have started to scale back their purchases. China, which is the largest foreign holder of our debt, actually decreased its holdings of Treasuries by $156 billion in the second half of 2011. This is scary!

    What, you haven't heard all this in the media? Of course you haven't. But I will give you the facts and the dangerous implications in today's E-Letter. Please read it carefully. We need to get this information to as many people as possible. Let's jump right in.

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