1/3/11
There is a history of us being pulled back from the brink of a financial catastrophe. One that few were aware of was the potential collapse of the huge Long Term Capital Management "fund", where it was so large and so leveraged it looked like the potential for bringing down the economy in 1998. But a massive rescue plan was forced on fellow investment organizations plus the economy was flooded with lots of liquidity. A 20% drop in the market was recovered in about 4 months. The question is "what might have actually happened?" or even "if there were more pressures that were too large for us to handle, would we be able to pull out?
We averted a disaster recently, despite the critics of the stimulus plan. The new stimulus plan (tax reduction act with unemployment extension benefits) will also bolster up a thinly recovering fragile economy.
But will the "house of cards", domino all of us into a lesser economic situation that is relatively long term?
When I analyze investing, I always look at how big a realistic bad scenario could get to be and I consider that against the reasonable high side. Except for the short term weak bit of recovery, I see very little upside - and it is difficult to see when the market will start going down. We won't be able to have the down until enough people see the overall weakness - and I don't know when they'll realize it. Probably not in the next six months, but I would be in great trepidation after that. After that there is a small chance of a market above mediocre, but only slightly above it. And there is a great chance of a truly mediocre market of very low positives and potentially 10% per year negatives for the next five years, assuming the governments act in an effective way.
My simple overview chart: (See the actual undisclosed total debt in the US.)
States with huge deficits --> Cut back spending --> Economy ↓
Countries with huge deficites --> Cut back spending --> Economy ↓
USA with huge debt (57 Tr) --> Cut spending ↓ --> Economy ↓
--> Taxes ↑ --> Profits ↓ --> Economy ↓
--> Consumer spending ↓ --> Economy ↓
Foreclosures here, more coming --> Weak housing prices ↓ Economy ↓
Developing world --> oil prices ↑ --> trade deficits ↑ --> interest rates ↑ --> Economy ↓
--> costs up ↑ --> profits ↓ --> Economy ↓
Trade deficit too high --> $ ↓ --> interest ↑ --> Economy ↓
Oil ↑, dollar ↓ --> inflation ↑ --> Economy ↓
Foreign competition for labor --> US wages ↓ --> consumption ↓ --> Economy ↓
Possible effect of disabling of education being improved (further hurting our ability to be productive), loss of the work ethic and character, an increasing epidemic of obesity and ill health...all of this are negative forces on the economy --> Ecomomy ↓
