While the economic headlines have generally been positive over the last 6 months, I’m more than a little worried that that optimism is misguided. Hold on to your hats, because the roller coaster ride might not be over; there are plenty of reasons to think that the second half of the dreaded “double dip” recession might be headed our way later this year.
My concern stems from the fact that the biggest reason for the current recovery–the second appearance of the controversial strategy known as Quantitative Easing (QE2)–is set to end on June 30th. With QE2, the government is printing more money, a strategy that provides an especially significant boost to the financial sector, which, as a result, now makes up a worryingly high percentage of domestic corporate profits (30%); the same level we saw before the 2007 crash. Like all government incentive programs, when the cash flow gets cut off, the bottom drops out. We saw the markets sag after QE1, we saw home sales drop after the home-buying tax credit expired, and we saw auto sales plummet after the “Cash for Clunkers” program ended. With Europe facing its own financial crises, our increasingly strong European connections are another cause for concern. The reality is that there’s no quick fix: it took us years to get into this mess, and it will take us years to get out of this. Retirees and those approaching retirement should exercise caution in the months ahead. Take precautions, don’t make any assumptions, and buckle up–things might be a little bumpy.