As the East Coast braces for Hurricane Earl, the stock markets brace for the next trend. After yesterday's rally ( a respectable 2%), stock direction is uncertain today.
Nouriel Roubini is a respected professor of economics who predicted the housing bubble and the current recession. He has also warned about the looming public debt crisis, which is becoming more noticed by commentators and voters even while it becomes worse.
Roubini Global Economics' table of trends (roubini.com/analysis/129876.php) shows a 40% likelihood of an " above-trend recovery" at 40%. It also shows the possibility of a double-dip recession at 30%. The possibility of a "severe" double-dip is 10%, stagnation is at 12.5%, and financial collapse at 2.5%.
The possibility of a "classic", above-trend recovery -- the type that has heretofore been normal in US economic cycles -- is at 5%. In other words, the possibility of normality is 5%.
According to my admittedly un-scientific analysis of the table, the combined likelihood of things getting worse (double-dip, severe double-dip, and collapse) is 42.5%. The possibility of recovery, whether normal or slow, is 45%. Of course, that's less than 100%. The missing 12.5% is in a category titled "stagnation".
In event of stagnation, governments may well be tempted to keep interest rates low by buying government bonds, including their own. In fact, this is already happening; it's referred to as "monetizing the debt". The government prints its own money and then finances its operation by purchasing the bonds it issues. As one may imagine, the consequences of these actions are not desirable.
Stagnation is itself a form of failure. If you lump it with the other negative outcomes, the likelihood of things staying bad or getting worse is 57.5%.
What about deflation, which this blog warned about previously? According to RGE, there's a 42.5% chance of some degree of deflation.
While examining these figures, it's wise to keep in mind that an unexpected shock, such as a major terrorist action or war, could have consequences of its own.
Finally, back to that 5% chance of a classic recovery from recession. When normality becomes statistically unlikely, it's time to reassess one's expectations. How does that play out in an average American's life?
Many people have investments through 401Ks and other retirement accounts, through mutual funds, or by individual purchase. Typically, a large portion of those investments will be in stocks. As we have noted before, stock prices may indeed be artificially inflated by government policies such as banning short selling. And please keep in mind that the market's behavior is NOT logical.
Are you willing to risk what wealth you may have by leaving it in stocks? Roubini himself currently invests no money in stocks. Consider very seriously whether or not you can place your faith in "normality" as we've known it.
