Why the Economic Situation’s Running Out of Options

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

There is a significant disparity between Wall Street expectations and Main Street’s reality. In an economy where the consumer is king, the future is murky at best. This is why investment risk is so high right now for equity investors. It’s unfortunate, but that’s the way it is.

The asset bubble created by inflated housing prices and loose credit conditions still hasn’t corrected itself. Wall Street is only now beginning to realize this. If you want to follow one real indicator on the health of the economy, you must keep tabs on the health of the housing market. And, as well all know, the real estate price cycle takes a long time to unfold.

I’m not bearish about the future, but I’m not bullish either. The way I like to describe my outlook for the economy is “low and slow.” We’ve recently experienced incredibly large amounts of direct intervention by government in the economy. This has cost an enormous amount of money and it’s the reason why recent GDP numbers seemed to be so good. But the tap can’t be open forever. There is only so much stimulus spending that the government can make. And, to top it all off, we have a central bank that couldn’t be anymore accommodating.

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So, what we have is an economic situation that is running out of options. Interest rates basically can’t go any lower. Government can’t really borrow and spend anymore money. The stimulus intervention is about to be unwound and this means that the economy will be out on its own.

Jim Rogers was right in his analysis of the recent financial crisis. The economy must be allowed to correct itself without bailouts. This is painful for individuals, but it is necessary. Anything else only delays the inevitable. This is the situation that is now beginning to be realized. The economy hasn’t really had the chance to correct itself since the financial crisis. Wall Street’s been drinking at a trough that’s overflowing with free money and Main Street hasn’t. The stock market’s recovered well, but the general economy hasn’t.

I think that we as investors and consumers need to be prepared for a long period of economic malaise until the economy fully corrects itself. With the interest rate cycle likely to reverse, the best thing an individual can do right now is pay down debt. The best thing an investor can do is be in no rush to take on new positions, with the possible exception of some gold.