Forecasts & Trends

The Fed Open Market Committee is meeting today and tomorrow to set monetary policy going forward. The big question is whether or not the Fed will decide to “taper” its monthly purchases of $85 billion in Treasury bonds and mortgage securities, which have driven stocks and bonds higher over the last few years. The decision depends largely on the Fed’s view of the economy, so they tell us.

No one knows for sure which way the Fed will go, but either way it will have a big impact on the markets. Both stocks and bonds have moved lower ahead of the meeting, and I expect a big move one way or the other depending on tomorrow’s announcement of the Fed’s decision on quantitative easing (“QE”).

Following that discussion, we’ll look at the annual report from the Social Security Trustees. As usual, the Trustees warn that Social Security is going broke – what else is new? But there is a growing movement to raise the early retirement age from 62 to 64. Will it happen? I doubt it.

Finally, I will update you on the growing list of Obama scandals and how the buck never seems to stop with the president. The result is that fewer and fewer Americans trust our government.

Last Friday afternoon, the Fed released the minutes from a May 17 meeting of the Federal Advisory Council (FAC) – that you probably never heard of before today. The Council is a group of 12 influential bankers from across the country who meet periodically and give the Fed Board of Governors input regarding the economy, monetary policy, etc. To my knowledge, no one in the mainstream media has reported on what you will read here today.

Following that discussion, I will review the latest economic reports over the last couple of weeks and let you know what we’re looking for in reports during the balance of this week.

Finally, I’ll give you my take on the escalating IRS scandal that is now being investigated in Congress. I will suggest to you that the roots of this scandal go all the way back to the landmark Citizens United vs Federal Election Commission decision made by the Supreme Court in January 2010. For whatever reasons, the media hasn’t seemed to make that connection.

It was so tempting to devote today’s E-Letter to a discussion about all of the scandals plaguing the Obama adminstration in recent weeks. In fact, some of my staff were very disappointed that I chose not to go there. My feeling was that the airwaves are so saturated with coverage of the Obama scandals, you might not want to see even more piling on from me, as much as I would like to. (There are some very good stories on the latest scandals in SPECIAL ARTICLES below.)

Today, we’ll focus on the latest news that this year’s federal budget deficit will likely be significantly lower than previously estimated by the Congressional Budget Office, and the reasons why that is. But let us not be fooled into thinking that falling deficits are a permanent thing. No, in fact, the deficits and the national debt will continue a troubling increase over the next decade and even longer.

We’ll also discuss the subject of our nation’s “unfunded liabilities” which now stand at a staggering $123 trillion, which is rarely ever mentioned by the media. And there are several other interesting points I will touch on today, but I don’t want to give everything away in this introduction. So please read on.

Today we will touch several bases. We begin with last Friday’s unemployment report which was hailed by the mainstream media, but had a lot of bad news to go with the good. From there we look at the estimated 6.7 million “missing workers” in this economy and ponder if they’re permanently gone from the employment rolls.

Next we look at the latest Gallup poll showing how many Americans rate the economy as excellent, good, only fair or poor. You may be surprised at the results, which aren’t immediately clear in the chart. Following that, we look at some interesting data on mutual fund money flows which show that the love affair with bonds continues, and investor demand for stocks is waning.

Finally, the International Monetary Fund downgraded its global economic forecast recently, including its forecast for the US and most of Europe. I have included the IMF’s graphic that lets you look at each country’s forecast for 2013 and 2014.

By the way, we have a lot of charts and graphs today, so the letter will print longer than usual.

This week, I veer from our usual economic and investment themes to tell you about what I believe is one of the greatest gifts you can ever give your children, grandchildren or others who are dear to you (or maybe even yourself). What I am about to describe is something that has literally changed the lives of dozens of my friends and relatives over the last 30+ years.

Today we’re going to revisit the Johnson O’Connor Research Foundation and how it can have a huge impact on the future of any young or middle-aged person who goes there for aptitude testing and career counseling. Johnson O’Connor helps people decide which career fields they are most naturally suited for based upon scientific testing of their unique set of individual aptitudes.

I have published similar articles on Johnson O’Connor (J-O) in the past because it has been such a godsend to everyone in my immediate family, many relatives and dozens of friends and business associates over the years. So, I urge you to read the following, especially if you have any loved ones who are struggling to find a career path.

Today we begin by examining last Friday's miserable jobs report. The official unemployment rate edged down fractionally, but it was because almost a half a million people stopped looking for work last month. In fact, the labor force participation rate dropped to the lowest level in 33 years.

From there, we look at the reasons why the Fed's massive quantitative easing (QE) is doing little to nothing to help the plight of the long-term unemployed. We also look at the growing number of “discouraged workers,” which are defined as those long-term unemployed who have stopped looking for work and the reasons why.

The number of Americans on disability insurance has increased for the last 16 years, and the total stood at a record 8.85 million people as of March, according to the Social Security Administration.

Finally, we are hosting a lunch seminar in Austin on May 8th at 11:30 featuring Hanlon Investment Management, a Registered Investment Advisor managing apprx. $3.5 billion in assets. If you live in Austin or will be in the area on May 8, call Joanne at 800-348-3601 to reserve your spot. Seating is limited. The lunch seminar will be at the Westin Hotel in The Domain at 11:30. This is also an opportunity for me to meet you personally.

The Fed Open Market Committee met last week and its decision was to continue the $85 billion a month in purchases of mortgages and Treasury bonds indefinitely. However, in his press conference after the meeting, Fed Chairman Bernanke hinted that the Fed could reduce these purchases later this year if the economy continues to improve. Very few in the financial media picked up on this important new clue, so I will expound on it today.

There are some reasons to believe that the economy will improve later this year. The housing sector continues to rebound. Home prices have surged so far this year. The number of people who are "under water" on their mortgages is falling, and foreclosures are down as well. Some other economic indicators are also pointing higher. So while the economy still feels like a recession, growth should be better in the second half.

Would you like to know the real story on why we haven't started building the Keystone Pipeline that would bring apprx. 600,000 barrels of oil a day from Canada and North Dakota to the Texas Gulf Coast? So did I. Today, I have reprinted the best article I have seen on this subject. I trust you'll find it enlightening, but it will almost certainly make you mad!

Finally, I've been warning about the bond market bubble since late last summer, and Treasury bond prices have come down significantly since the peak back in late July. I close out today's letter with some links to the actively-managed bond programs we recommend. If you still haven't taken steps to protect yourself from bond losses, I urge you to consider moving to one or more of these professionally managed programs before it's too late.

The demand for high-yield bonds and bond funds has literally exploded over the past couple of years as the Fed continues to keep downward pressure on interest rates. Often known as "junk" bonds, these debt instruments typically pay a higher rate of interest to compensate for their higher potential for default. Some retirees see this higher income as a godsend, but the higher yield definitely comes at a price.

Unfortunately, many high-yield bond investors are buying and holding these bonds and bond funds without regard to the risks they are taking. As the number of analysts predicting a high-yield bond bubble increases, the risks of buying and holding these securities increases.

This week, I call upon high-yield bond expert, Steven D. Landis, CFP®, to shed some light on how you can participate in the higher yield and potential capital gains in high-yield bonds while minimizing the risks of doing so. He'll also explain why it really doesn't matter whether there's a high-yield bond bubble now or in the future, IF you have the right strategy on your side.