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Near-Term Recovery Is Impossible


Cleansing the economy is creating a vicious circle that will be hard to break.

I love bull markets. I like to have faith in the future of our economy. And I'm tired of all the pessimism tied to the recession.

Apparently, the entire market feels the same way. Since hitting year lows in March, the S&P 500 has been on a tear, rising nearly 60%.

The Depressing Truth

But as optimistic as I want to be about a rebounding economy, and as much as I want to see the market continue to recover, I also have to face reality. And the reality is that a fully recuperated economy is nowhere in sight.

Granted, the market is a leading indicator and valuations are based on future expectations. Therefore, emerging signs of stabilization do warrant price appreciation.

The problem is that stabilization is as far as we're going to get in the near future. The economy is just beginning to claw its way out of a deep recession and a long road to restoration lies before us.

There are certainly signs of improvement -- the financial system is no longer on the brink of failure and the housing collapse has significantly moderated. But antsy investors have gotten ahead of themselves in anticipation of full out recovery as the ever-important unemployment rate is expected to linger at high levels for some time and ultimately prohibit economic growth.

A Country-Wide Cleaning Binge

Our economy has been forced to rid itself of excessive waste, ranging from toxic assets to unsustainable debt levels to over-staffed offices. While we continue to "clean house," more jobs will be lost as companies tidy up organizational structures and implement tighter expense control. Of course, this de-leveraging process is starting to slow, but purging the excess was the easy part.

Now, we're tasked with rebuilding a leaner and more efficient economy. This will take significant time as we adapt to a fundamental shift that has occurred in our economy and will leave large portions of the economy jobless for an extended period of time.

Depending on the Consumer

This is problematic for economic growth because the economy heavily relies on consumer spending to propel growth. Accounting for nearly 70% of GDP, consumer spending plays an integral part of recovery. Consumers must increase their spending levels before economic recovery can really be achieved.

But how can this happen when unemployment is continuing to increase to record levels and isn't expected to return to normal for an extended period of time?
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