When it comes right down to it, I guess I am worried about the economy for the next 18 months. Call it a gut feeling, but I just think that there is more pain ahead. I could be wrong, but I can’t escape this view at this time.
I guess it just comes down to the fact that you can’t have strong income growth when the real estate market is in a major correction. I’m also trying my best to listen to what central banks are saying around the world, notably, that the credit crisis isn’t over and investment risk remains high.
So, with this view, it does make it more difficult to be bullish on stocks. The one thing that the stock market is good at, however, is speculating on the future. Therefore, stock prices should move in anticipation of economic recovery. The question that is bothering me is: to what degree will the economy recover? We might just be stuck in a period of very slow growth for the next several years.
If this happens, inflation will become a major threat, because, when incomes aren’t growing and raw material costs are, it doesn’t take too long before wealth gets eroded.
It’s my view that there isn’t much more that policy-makers can do going forward. The cycle is going to have to right itself. We are going to have to wait for a new equilibrium and this is going to take time.
Practically speaking, it might make more sense to pay down debt than to take on new positions in stocks. Nobody ever went wrong paying down their mortgage. I sincerely hope that solid growth will return to the economy in 2009, but I’m realistic about the prospects for real estate. I wouldn’t be betting the farm on anything just yet.