I'll emphasize again that at the point we do observe sufficient evidence for investors to concede recession, the potential downside could be abrupt, leaving little opportunity to make defensive changes after the fact.

A pre-condition for making a market bottom is the recognition that the economy is in a recession. Despite all the indicators, the market consensus doesn't seem to quite want to concede that reality yet. A good indicator of sufficiently bearish sentiment occurs when commentators start to talk about a double-dip slowdown. Right now, I have not even seen the “double-dip” term in the vocabulary of the economic bears like Nouriel Robini and David Rosenberg.


Likely fiscal drag on the economy in 2009 and 2010
The likely catalyst for talk about a double-dip will be the realization a) America is in a recession; and b) that there will likely be further fiscal drag on the economy in 2009 and 2010. The United States is going to see a presidential election in less than two months but I have not seen anyone discuss this: The propensity of new presidents is to take any economic pain early in his term (and blame his predecessor) so that he can have a solid base for re-election.

A likely scenario will be the new president, whoever he is, will assume office and be shocked! (shocked, I say!) to find the cupboard is bare and be forced to raise taxes as a result. The Washington Post has a good summary of McCain and Obama’s tax proposals. Obama’s stated net tax rate is roughly neutral for the general population (doubtful). As for John McCain, despite his stated policy to lower taxes rates, Greg Mankiw posted an analysis that shows the market believes that the likelihood of a tax increase under a McCain Administration is 74%.

Equities would sell off on the prospect of a tax increase and the resultant fiscal drag. That selloff could possibly set up the market bottom of this Bear.