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The economy is a mess. But how will get straightened out? Good question. Some possibilities include

  1. hyper inflation – wheelbarrow of dollars to buy necessities like food
  2. modest inflation – costs are up, no new credit extended, existing debt creatively refinanced to avoid foreclosures, consumer debt declining through payoff and/or “forgiveness”, interest rates increases (over 5.25%)
  3. recession / mild depression – just getting by, much belt-tightening, few luxuries, simple pleasures, falling interest rates (closer to 4% perhaps), stock market correction of ~20%
  4. big depression – 1930s style with soup kitchens and bread lines, homelessness, defaults. foreclosures, drifting population, serious global slowdown

Well, that about covers it. So which will it be and how to tell which it is shaping up to be? What to do for each scenario?

economic and market cycles graphic Great chart to illustrate the economic and market cycles from Matt Blackman, writing in the EquiTrend Weekly Market Watch via John Mauldin

Assuming you subscribe to the Austrian school and believe in cycles, Mauldin points out that new cycles are never identical to the previous one, but there is a rhythm. Falling interest rates often signal (trigger?) the expansion phase, and rising rates eventually start the contraction phase. We would now be at 3 o’clock in this illustration. Actually have been here or have returned here without passing GO thanks to the interventions that have prevented the normal contraction from occuring. Think of this as a big spring where more and more pressure is exerted to keep the “you are here” marker from moving around the path. How long will the pressure hold back the inevedable? No one knows. We have never been here before.

Consumer credit
inflation – everyone gets more dollars so debt is repaid with smaller dollars

Mortgages
creative financing to avoid forelosures and/or sales

Government spending
spend their way out of the recession / dpression

Employment
massive layoffs to get costs under control
unemployment, under-employment increase government spending
small business /sole proprietor increase as individuals create jobs and incomes sources for themselves

Saving
increased interest rates encourage saving
avoid stock as too risky, regardless of the demonstrated return

Stock market investments
20% correction

Bonds
safe haven

Global factors
price of oil – below $60 per barrel or can OPEC actually hold the price above this number
Europe – not in great shape economically
Japan – source of cheap money
China – protectionist policies are being proposed by both the Chinese and American governments

breadth, depth, concentration / specialization / focus

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