This is no ordinary economy. Here we are, about to enter the fourth calendar year of recovery, technically speaking. Yet for most people, not much has changed. Home prices are flat-lining. Job growth remains inadequate. Wages are stagnant. Hopes for the holiday shopping season, so high on Black Friday, are starting to fade on news that November retail sales disappointed.

Such are the consequences of debt-fueled hedonism. According to Richard Koo at Nomura Research Institute in Tokyo, we're in the midst of our own Japanese-style malaise. It will be our own lost decade as businesses, banks and consumers pay down debt and boost savings despite ultralow interest rates. In Europe alone, Morgan Stanley is looking for bank deleveraging of 2.5 trillion euros -- almost $3.3 trillion -- over the next 18 months.

And instead of acting as a borrower of last resort, most of Washington, like most of Europe, is obsessed with austerity and tight money. This recipe for a debt-deflation spiral is the same as the one followed in 1937, which delayed recovery from the Great Depression for years.

Last week, in "Why all signs point to chaos," I warned that all of this sets the stage for more social unrest -- overseas, and here at home -- of the kind that has already birthed Occupy Wall Street and the Tea Party movement. I also warned that the eurozone, as it stands now, is probably doomed.

Image: Anthony Mirhaydari

Anthony Mirhaydari

But there's hope for investors here, because trouble spells opportunity. And chaos, from protests, revolutions, bank failures and debt defaults, means there will be plenty of trouble in the year to come.

The investing outlook

With the economic outlook dominating, and swaths of the stock market rising and falling based on things like European sovereign debt yields and currency cross rates, investing fundamentals like earnings growth and profit margins seem almost quaint. Right now, with all the volatility and with tight correlations, sector allocation trumps stock picking. Asset allocation trumps everything. It's a black-or-white, all-or-nothing market.

That doesn't mean there is no way out or that there are no profits to be made. But simply running and hiding won't work. Cash deposits and Treasury bonds, while good places to stash your money for the short term, don't offer enough return to be long-term solutions. I don't know about you, but I need my money to work and grow to reach my financial goals.

Other traditional safe havens, such as gold, are increasingly exposed to the vagaries of currency fluctuations and the economic outlook. Witness the dramatic 8%-plus decline in the SPDR Gold Shares (GLD, news) exchange-traded fund this month on lower inflation expectations and a strengthening U.S. dollar.

Instead, a new strategy is needed. Something to cope with a range-bound market resembling, of all things, the churning, go-nowhere action of the 1960s and 1970s -- a period that was also rife with chaos, unrest and harsh political divisions.

The death of the debt supercycle

The single most important factor for investors to keep in mind, according to Morgan Stanley's Graham Secker, is that the framework that helped investors build and protect wealth for the last three decades has been broken. That framework was based on the debt supercycle, a vast expansion of credit and borrowing, and the idea that policymakers could iron out the ups and down of the business cycle. Before the housing crash, economists and central bankers indulged in self-congratulations over their "great moderation" of inflation and gross domestic product.

It was a lie.

They merely postponed and magnified the volatility by flooding the system with cheap cash and allowing credit creation to run out of control. Politicians were complicit in this. After all, what elected official wants to pressure the Fed to pull the punch bowl and raise interest rates just when the party's getting started (aside from Ron Paul)?

Debt outstanding domestic financial sectors

All of this credit creation -- shown as the blue line in the chart above -- helped moderate the swings in GDP between the early 1980s and 2007. It also helped fuel a long, powerful, secular bull market in stocks, particularly small and midsize stocks. (Large-company stocks petered out over the last decade, but that's another story).

Between 1982 and the summer of 2007, the S&P 400 Mid-Cap Index gained nearly 2,360%; the U.S. economy grew by a mere 344% over the same period.

This is all ending now; in fact, the debt supercycle is working in reverse as households and businesses deleverage, cutting debt through repayment and default. Policymakers are bungling their response. The emphasis has been on the Federal Reserve and other central banks not only cutting interest rates but printing money with which to purchase bonds in the open market -- effectively force-feeding cheap cash into the system.

While the negative inflation-adjusted interest rates that result -- something I've dubbed the "stealth stimulus" -- helps slowly cut debt burdens by transferring wealth from creditors to borrowers, they're also very dangerous. The process is sowing the seeds of massive inflation, as it did in the 1960s and 1970s before 19% short-term interest rates were needed to get price pressures back under control.

It also won't, on its own, repair the credit channel. Thus, on its own, the Fed can't restore growth.

Continued on the next page. Stocks mentioned include Oneok Partners (OKS, news), Pfizer (PFE, news), Citigroup (C, news)and Alcoa (AA, news).