Exit strategy

It’s no secret, the world economy was propped up last fall and winter by the governments of the United States, Europe and China. If it weren’t for those props, we would probably still be on the way down.

The question now becomes, how will the governments of the world remove those props?

In ancient Rome, building an arch required props, too. Once construction was complete, the props were removed and the arch would stand firmly in place. It is rumored that the builder would stand underneath the arch as the props were removed to show how confident he was in his construction.

The reason why such a builder would confidently stand under his arch is that he knew the arch would hold when the props were removed. My question is: how confident is anyone that world economies will stand on their own without props?

I think current builders have demonstrated their confidence by both not removing the props and by only tentatively talking about their exit strategy, which is a euphemism for removing the props.

How can the central bankers of the world and various treasury departments know when to remove their props? This is a tricky question.

If they remove the props too early, the economy will go back into recession. If they wait too long, then high interest rates and high inflation may do the same thing. The governments of the world have a very difficult task ahead of them. I don’t envy their position.

But, as an investor, I have to wonder what will happen.

Will the world economy stand on its own even though the fundamental underlying problems really haven’t been addressed?

Are government bureaucrats aware that a huge number of mortgage loan resets are coming up and may send the housing and credit markets back into decline?

Have individuals and companies trimmed expenses enough to foster self-sustaining growth?

I don’t have any answers to those questions, but I know I’m not going to be standing under this particular arch as the props are removed.

Instead, I’m repositioning my clients and my own money to prepare for the possibility of a wobbly arch. That means buying high quality companies and perhaps a little insurance against the downside. It means being prepared for the possibility of both deflation and inflation.

It will be interesting to see what happens, even more so a good distance away from the arch.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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