I was discussing the market with my buddy (yes, alcohol was involved). He was wondering if I could peer into my crystal ball and tell him when the market would have a pullback he could invest into.

I could not.

I told him that while I thought the market needed a significant drop, I could not predict whether it would happen tomorrow, in seven weeks, or seven years. I walked through the scenarios.

Ok, it’s probably not going to happen tomorrow. In fact, I was recently discussing the market with southpol. Actually, ignore that link, and look at this one. Southpol and I disagree on a lot of things from a philosophical perspective, but we enjoy discussing such topics in a civilized manner (the fact that we are separated by many states enforces said civility). Anyway, I was telling southpol that I was betting against the market and was no longer well hedged to profit from additional upside. Realizing that I didn’t actually have a convincing argument, I bought some more call options (that’s stupid gambling terminology for betting on more upside). The fact that I just took a risk on the upside should be plenty of reason to bet on the downside. I’m that lucky.

Let’s look at the seven year pullback next. Seven years is a pretty normal duration for a bubble. How could we possibly have another bubble after having the dot com bust and the housing bust? Well, it turns out that some cool researchers just studied this problem. In their experiments, bubbles could happen, followed by a second bubble. When the researchers asked about the second bubble, the study participants said that they thought they could get out in time, so even though they recognized a bubble, they went along. A third bubble didn’t occur naturally. It’s one of those fool me …you can’t get fooled again scenarios that president Bush spoke of. But, if you flood the system with liquidity, you can get a third bubble. Sadly, this is one of those things that was posted everywhere, and now I can’t find a reference (if this sounds familiar, let me know, and I’ll make a link). Anyway, there’s a risk that he Fed could cause such a bubble (they are trying very hard to create inflation). I actually discount the seven year risk because I think it may be difficult for the Fed to blow another bubble. If inflation picks up a notch (post Cash for Clunkers nonsense), I’m wrong. Panic.

Sometime in the next seven weeks makes a lot of sense (this number was chosen because of the year figure. It’s not precise). There are huge problems, and expectations seem to be rather high. If you look at the graph for retail (try looking at XRT, the retail ETF), you’ll notice that the March low in the stock market wasn’t so bad. Retail seems to be doing well, as far as the market is concerned.

I mentioned a few headwinds for the consumer. The first is that consumer credit is contracting. The second is that the last time an auto gimmick caused a rise in auto sales (the Cash for Clunkers gimmick appears to have taken the SAAR from 9.5 million to 16 million), the non-auto portion of consumption took a 0.3% dive. Actually, that’s true the last two times. If it’s true this time, that’s still significant. But, you won’t notice the problem in GDP growth. Cash for Clunkers may have contributed 2% to GDP growth. Kind of impressive when you consider the fact that the consumer is tapped out, and had to add debt to buy a car in the first place. The US automakers have responded by increasing production, despite the fact that the number one recipient of Cash for Clunkers’ cash, Toyota, is decreasing production. It seems that GDP will increase, if only from building inventory, in both 3rd and 4th quarters, just from auto manufacturing alone. Yes, even if nary a car is sold, we’ll get two quarters of GDP growth off of the malinvestment in automobiles. Will that magic number be enough to kick-start the economy? I wish I knew.

The housing statistics that have come out over the last week have been encouraging. I don’t think they’re indicative of a true bottom. Calculated Risk, the world’s expert on the subject, is also cautious. It is worth noting: cure rates are down and delinquencies are up. That’s not an environment for recovery. Of course, if this turns out to be the housing bottom, you’ll also know how wrong I was in retrospect.

I haven’t laid out the worst scenario. After all, a stock market crash in the next two months wouldn’t be that bad. We’d move on. The worst problem is if I’m wrong in a way that leads to massive inflation. That pretty much guarantees a substantial downturn in jobs and quality of life. It’s not that this is a scenario discounted by everyone, either. There are many smart people afraid of big inflation. Heck, I’m honest enough with my crystal ball to recognize the fact that this is still a possibility. I just can’t deal with such a reality. Big inflation is too bizarre. The best bet for big inflation is to buy property. And that’s why I can’t handle it. How could the answer to a housing bubble be to buy property?

I do think that retail is ridiculous, though. How can stores be closing left and right and retail still be a good investment? It’s silly. If the top line of WalMart improves, we’ll not only know that I’m wrong, we’ll know exactly how much I’m wrong.

Hopefully I’ve provided enough checks against me that we can all rejoice when I’m wrong. If I’m right, panic.