I just finished a battery of media appearances on Fox Business, Bloomberg, BNN and CNBC Asia, and without exception I was asked about two things: President Barack Obama’s jobs bill and the U.S. Federal Reserve’s “QE3.”
The first thing investors and analysts alike want to know is whether the president’s jobs bill will work. The answer to that question is “no” — not as it stands, anyway.
The second question is whether Federal Chairman Ben Bernanke will further extend the central bank to help the economy. Well, I do think the Fed will intervene, but I don’t believe for a second that the central bank’s intervention will help the U.S. economy.
As a result, we’re likely to see stocks enter into a bear market and retest their March 2009 lows.
I know that’s a terrifying thought. But to be perfectly honest, there’s nothing Obama or Bernanke can do at this point. If companies don’t want to spend the $2 trillion worth of cash they’re hoarding, there’s very little the government can do to encourage them to loosen their purse-strings.
That said, I want to give you five specific steps to take to protect yourself from the looming bear market, preserve your sanity — and even profit.
First, you need to understand the dangers that are fast approaching.
A Roadblock to Recovery
Obama and Bernanke can toss all the money they want at the economy. But no amount of spending can change the fact we need the following three things to get our market moving again. They are:
As it currently stands, the U.S. economy will be lucky to log 1% growth this year, which is even lower than the anemic 1.5% I predicted in my annual forecast in January.
That’s pathetic for a nation that spent more than $1.4 trillion of borrowed money on “stimulus.” This lackluster growth is also evidence that the Obama administration’s $800 billion stimulus plan — and the Fed’s two rounds of quantitative easing — did absolutely nothing to salvage our economy.
Citizens are scared silly. Businesses are uncertain. They’re uncertain of regulatory changes, uncertain of taxes and uncertain about their overall economic environment. So they’re doing what rational people do when confronted with the unknown: They’re hunkering down.
And with good reason.
The typical U.S. family got poorer during the past 10 years because of a decade-long income decline. Median household income fell to $49,995 last year and is now 7% below where it was in 2000. The number of people living in poverty has risen to 15.1%, the highest level since 1993.
It also should be noted that a large portion of that decline is directly attributable to inflation, which the Fed continues to assert is “transitory.”
Out of the Fire …You might be holding out hope that the president’s jobs plan will help turn things around — but it won’t.
Jobs exist because they create value. You can’t just assume businesses will hire for the sake of hiring, which is essentially what the Obama administration’s plan does. There has to be demand. All the employees in the world won’t do any good if business owners can’t grow their customer base and their revenue.
This is true for infrastructure as well. Infrastructure should be built as a means of increasing productivity — not just to put bodies in motion. That’s something the “bridges and tunnels” crowd doesn’t seem to understand.
That’s why we have to consider the president’s plan for what it is — yet another government-sponsored diversion of capital and resources.
As such, there are the usual questions about how Obama wants to pay for this. And that’s assuming the plan even manages to get through Congress, which I don’t believe it will.
I think the jobs bill is dead in the water — and that the fight over some of its elements will create more uncertainty than jobs. That will be bad for the economy and even worse for the stock market, which will react negatively to the bickering and yet more indecisiveness.
Enter the Fed.
A Five-Step Plan for Dealing with the Looming Bear Market
When the president’s jobs bill fails — just as his previous attempts to jump-start the economy with deficit spending failed — and unemployment rises a year from now if not sooner, Bernanke undoubtedly will step in with QE3.
Of course, it might not be called QE3. It likely will be called “Operation Twist,” or some derivation thereof.
But here’s the real rub. Quantitative easing, no matter what it’s called, is a euphemism for printing money. It is an attempt to bring down longer-term rates and twist the interest rate curve in such a way that companies have no choice but to spend money, and investors have no choice but to take on more risk.
But how low can you go when rates on the short end of the curve are already near zero? Not very.
I saw this firsthand in Japan. The Japanese government took rates all the way down to zero — and nobody wanted the money! Japanese companies wouldn’t spend their cash then any more than U.S. companies will spend the $2 trillion they’re sitting on now.
Instead, the government will be “forced” to spend even more.
So while Bernanke and Obama are trying to dig their way out of this mess, they’re really only digging our economy into a deeper hole.
That’s why stocks are destined to retest the market lows of 2009. I don’t know exactly when, but I intend to help investors safeguard their assets and profit by preparing for it now — before it actually happens.
Here’s five steps to get you started:
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