Outlook: Want to See Something Really Scary?
Passenger: Hey, you want to see something really scary?
Driver: You bet.
Passenger: Really?
Driver: Yeah.
Passenger: Okay. This is really-really scary now.
Driver: I trust you.
Passenger, Okay, pull the car over.
Driver. Pull the car over? Oooh.
Passenger: You want to see it?
Driver: Show it to me while I'm driving.
Passenger: No, I can't. This will only take a couple of seconds.
Driver: Two seconds.
Passenger: Just pull it over.
Driver: Okay, scare me.
Passenger: Are you ready?
Driver: Uh-huh. What are you doing?-- Twilight Zone: The Movie (1983)
This week was an important one in the capital markets. There were many reasons, but most important was that the market stopped being afraid of the same things as usual. With Citadel marking distressed asset-backed-securities to market, and with a bid showing up for Citigroup, things suddenly stopped seeming a lot less frightening out there. Granted, we're a long way from being home-free and past the credit market meltdown, but it will take different things -- whether in kind or in magnitude -- to spook investors going forward.
So, as an exercise, what realistic things would it take? What would, in other words, be something really scary? Here are some example, and we can talk about their relative and absolute likelihoods:
- Long/severe U.S. recession
- Global recession
- Significant spike in inflation
- Massive and unexpected new round of asset-backed security writedowns
- Major bank/financial services provider bankruptcy
- New laws/regulations
- Oil hits $150 (or higher)
- New political/economic tensions with China
- War in Iran
Which of these seems most likely to you? While outlier events, like terrorist attacks could do the deed, it will otherwise take something like one of the above to tank markets from here. It almost certainly won't be the same bogey-men that made November such a mess. It strikes me that a more serious U.S. recession than expected is right up there, as is a possible meltdown at a major financial company, but the latter would almost certainly see a bid from somewhere.
Your thoughts? And as a fun Friday aside, you can also watch the classic Twilight Zone segment I precis above.
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