"Be not angry that you cannot make others as you wish them to be, since you cannot make yourself as you wish to be"
Thomas à Kempis

I guess I will never stop being amused by the investment related media headlines out there... One day we hear a story about the "major bubble" in oil, another day "about oil prices going to $250". Same divergence with interest rates, investment banks or for that matter with anything else that is a "soup du jour" of the moment- I guess it is an almost bullet-proof strategy- throw a bunch of things on the wall, make lots of extreme statements and then see what sticks, and at the end declare that you were right.

Recently, forecasting shapes of what seems to be an inevitable eventual recession has become a very popular topic of conversations. Here some of own views and opinions on the subject. I will try to describe them in the "media-like terms" hoping it won't be too boring ...

Some believe that the US Economy is in for a V-shaped recession- a quick and painless slump followed by a fast recovery; others think we might see a W- shaped one with one quick dip followed by a short recovery and then followed by another larger dip with an eventually inevitable upward move. And the last group, ("Elliot Wave" crowd) thinks that we are destined to live in the L- shaped world - with the US Economy entering a decade long Japan-like period of stagflation for the years to come...

I'll start by eliminating the third scenario outright- in my opinion the repeat of Japanese scenario here in the US is pretty much impossible, because we are 1.Nation of spenders, not savers 2.Are as far from the deflation as one could be- "have you seen the inflation numbers lately?"

On the other hand, I believe that the first two shapes of economic downturn are still very much possible- and the end result could very well depend on the next move of the Washington wizard called Ben Bernanke. So below is a hypothetical scenario planning exercise to make sure that my portfolio is ready for the eventual outcome whatever it might be.

Let's now introduce some core factual statements:

1. US Economy is going through a period of highest inflation in more than a decade- all the talk about core, non-core inflation is irrelevant at this point- you can only call high energy and food prices non-core and temporary if they indeed lasted for only a short period of time ...

2. Inflation is always a direct of excess monetary liquidity. High commodity prices are merely a symptom and thus are not likely to be cured until the excess liquidity is drained...

3. Healthy financial sector is a fundamental requirement for any well functioning growing economy- without normal access to credit- the economic system as we know it cannot function...

4. Banks are very unlikely to start lending in a normal fashion again until they become confident that the value of their collateral is no longer eroding.

5. Financial sector especially the investment banks are facing significantly more restrictive regulatory environment and lower leverage

6. It is very rare, however, when you see a combination of persistently high overall inflation and accelerating deflation of the core collateral in the financial sector (real estate) -simultaneously.

7. The longer the current restrictive credit situation drags on, the more likely it is going to spill over to new areas- Fed has to force the banks to start lending again

8. FDIC is now going to virtually force banks to raise more capital whether they need it or not in the short term- expect more capital dilution and dividend cuts...

9. Thus one stakeholder in the financial sector is going to suffer more than the others- shareholders