Is the financial crisis over? It depends on what we define as the crisis. If we mean the credit freeze which began in the fall of 2008 and the panic that followed, yes, I believe the crisis is over. Remember the fear we all experienced when we heard that blue chip financial companies like Lehman Bros. and Bear Stearns were disappearing instantly? Remember when Paulson cited the heads of the greatest banks in the US and “forced” them to accept a massive gift of cash (what else can you call what he gave the banks)? Remember when we read the Reserve money market fund was breaking the “buck per share” rule and investors were losing money? When the chairman of GM flew in his private plane to seek his share of the billions being given away by the government? All these events now seem part of history now, so yes, the crisis is over. But does that mean that a new party has begun?
No, I don’t think a new party has begun. I believe that things won’t get worse, but it does not mean they will improve that much. For example, retail sales for the month of March, compared to the same month last year, were announced yesterday. According to the New York Times, sales fell at Dillard’s (down 19 percent), HYPERLINK “http://topics.nytimes.com/top/news/business/companies/macys-inc/index.html?inline=nyt-org” \o “More information about Macy’s Incorporated” Macy’s (down 9.2 percent), HYPERLINK “http://topics.nytimes.com/top/news/business/companies/penney_j_c_company/index.html?inline=nyt-org” \o “More information about J. C. Penney Company.” J.C. Penney (down 7.2 percent), and HYPERLINK “http://topics.nytimes.com/top/news/business/companies/kohls_corporation/index.html?inline=nyt-org” \o “More information about Kohl’s Corp” Kohl’s (down 4.3 percent). Luxury chains were hit harder. Sales at Neiman Marcus, which includes Neiman Marcus stores and Bergdorf Goodman, were down 29.9 percent. Saks (down 23.6 percent) and HYPERLINK “http://topics.nytimes.com/top/news/business/companies/nordstrom_inc/index.html?inline=nyt-org” \o “More information about Nordstrom Incorporated” Nordstrom (down 13.5 percent) also fared poorly in March. In other words, it is still tough on Main Street. Those figures don’t seem to indicate that we have entered a new era of economic growth. There is no longer a funeral, but it’s too early to break out the champagne.
For to the financial situation to improve, the economy needs to begin growing at 2-3% per year, and that will take some time. What this means is that, for now, we cannot expect real estate to start appreciating again at 20% per year, or the stock market to do the same. If the economy won’t improve quickly, what do I foresee? Certainly, inflation will pick up, the dollar will drop in value versus other currencies, and interest rates will creep up. Why do I foresee these possibilities? Because the deficit figures from the federal government are chilling. No, they are horrendous. Bloomberg reported yesterday that the U.S. budget deficit surged in March. The excess of spending over revenue climbed to $192.3 billion, compared with a gap of $48.2 billion in the same month a year earlier. The deficit got 4 times worse, in one year. This happened because spending increased to $321.2 billion yet revenue fell 28 percent to $129 billion. The deficit, six months into the 2009 fiscal year, already exceeds the record set in the entire previous year.
How will the government finance this massive deficit? My bet is by printing money and, of course, by borrowing. Printing money is likely to cause inflation, which will benefit the government’s tax collections efforts. In other words, they will be able to raise more revenue without raising taxes. What a magical solution! So, how will you protect your finances if inflation accelerates and interest rates go up?
If you need help with your financial planning or investing, please call me at (714) 771-6000 or send an email to professor@ulivi.com. I will be happy to set up a free consultation for you.