It can be difficult to see the forest for the trees when stock markets are rising, commodity prices are recovering and the media is touting hot burgeoning world economies but if you step back and examine the activities in the global economy and the global financial markets over the past 2½ years, based on history, it looks like the roadmap to sustainable recovery has three waves. Words: 555
In further edited excerpts from the original article* Bryan Rich (www.moneyandmarkets.com) goes on to say that we are likely only two-thirds of the way through the economic drawdown which should unfold as follows:
Wave #1: Panic
The initial wave was panic-induced, risk aversion. It was the unraveling of the credit bubble, the seizing of the financial system and the flight of capital from all corners of the world back toward the center (the United States).
Wave #2: Stabilization
The next wave was the eye of the storm. Here, risk appetite bounced back. Global central banks engaged the biggest experiment in history in an effort to stabilize a rapidly deteriorating financial system. In the process, they opened up the money spigot and flooded banks with capital, backstopped failing giants, guaranteed obligations, and printed trillions of dollars. For many, this started looking more and more like the recovery phase but, in reality, it was nothing more than a retracement of the initial, panic-induced risk aversion trade.
Wave #3: Pain & Cleansing
The final wave is another bout with pain. This is where all of the underlying problems come home to roost. Ultimately the problems get faced and worked through, only after which a path to a sustainable economic expansion opens. This phase is best described as the final leg of the risk aversion trade. This is where global investors, again, flee for safety as the uncertainty elevates surrounding the fallout from damaged economies and the ability of central banks to manage all of the aggressive policy responses. Here, investors abandon the pursuit of return ON capital, in favor of return OF capital and this is precisely what we’re seeing now in response to the dominoes lining up with sovereign debt problems.
The final phase will be a time of higher savings and flight back to the U.S. dollar, i.e. more aversion to risk. It’s also a period that begins the healing of economies and it’s driven by austerity. This means higher taxes, higher savings, a stronger dollar and a lower standard of living. In short, it’s a period of rebalancing and rebuilding.
*http://www.moneyandmarkets.com/risk-aversion-the-final-wave-7-37730 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. To view archives or subscribe, visit http://www.moneyandmarkets.com.)
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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