Every time the market gets bearish, pundits begin fretting about a “double-dip” or return of the recession.  While anything is always possible, it is unlikely.  I have argued for almost three years that a financial crisis is very different from any garden-variety recession. 

There has been some impressive research by Ken Rogoff of Harvard whose “research also shows that following financial crises, economies tend to grow only fitfully.”  In other words, there is no sharp recovery, like we enjoy from “inventory-correction recessions” or “shock-induced recessions.”  It is long, painful, and irregular.  That’s why our unemployment remains so stubbornly high. 

Of course, if we were to sustain a shock at this time in our long, slow, and vulnerable recovery, we could fall back into recession.  That’s why I carefully watch (1) the debt ceiling, (2) the Chinese economic engine, (3) the price of oil and (4) Europe, of course. 

The budget wrangling over the debt ceiling really is debilitating the market.  There is already a budgetary process that allows us to be disagreeable with each other, without involving and roiling the international credit markets.  It is like inviting your mother-in-law into an argument with your spouse!

With the fear of becoming a “broken record,” I still believe that a major derivatives failure could cause another financial crisis and take us back to March of 2009.  The few new regulations to control this risk were supposed to take effect next month but have been delayed until year-end.  The regulations were minimal, focused primarily on disclosure about the size of the $600 trillion market.  The lobbyists were successful by limiting the regulation to begin with and successful again by delaying, if not killing, the implementation.  For example, who knows who gets hurt from credit default swaps on Greek bonds?  The problem is that nobody knows, so how do you avoid those banks who could get hurt?

Is it time to panic?  Of course not!  If the debt ceiling is not raised before the August 2nd deadline, I would consider panicking.  If there is a major derivatives failure, I would consider panicking.  A failure of the Chinese economy or a crippling spike in oil would not cause me to panic.

It is summer . . . go to the beach!  Long time readers will know what I’m watching. . . .