Unwinding Economic “Fixes”!

Much of the stimulus that powered the stock market to a 70% gain from the March low has disipated and has contributed to stalling the rally.

When the economy and financial markets were selling off drastically, global central banks and governments took drastic measures by using record-low interest rates and trillions in stimulus money. The goal of stabilizing the financial situation worked wonders, bringing markets back from the edge of collapse.

As we approach the one year anniversary of the March 9 stock market bottom, those remedies are in the early stages of being taken back. This process has been referred to as the “unwinding” of an unprecedented fiscal and monetary “booster shot.”

Now investors are growing more risk averse as they must decide if the good times can last as the government pulls back. Investors are fearful that the “pullback” will lead to higher interest rates and skyrocketing deficits.

Central banks, including the U.S. Federal Reserve, are starting to prepare investors for the day when they begin to tighten access to what is often called cheap money. The concern is that borrowing rates will start to rise, which could slow the economic expansion.

Trillions of dollars in government stimulus have created debt loads so big that many countries such as Greece are having a hard time keeping up with their payments, renewing concerns about debt crises, bailouts and financial contagion. While Greece might be only about the size of Maryland and Connecticut, Greece’s “debt problems are symbolic and show that there are limitations to borrowing.”

China, the world economic engine, is slowing its robust growth by tightening credit standards, after the government used lots of cheap cash to inflate its economy.

It is becoming painfully clear that these are long-term problems, and investors have to realize that the exit strategy is not going to be easy.