David Kotok's vision

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We Asked David Kotok What His Biggest Economic Fear Was, And What Told Us Was Absolutely Terrifying

A scenario that combines geopolitical unrest, surging oil prices, overly-loose monetary policy, and a tax disaster.

Business Insider,

17 Sepetmber, 2012

The market is characterized by bulls who are in deep anguish: On the one hand, they think the market is super-stretched. On the other hand, they see the Fed and the ECB going to new heights of accommodation, and don't want to fight that trend.

So we're trying to discern something: What's the #1 threat to this market right now?

We asked David Kotok of Cumberland Advisors what worries him most.

In a phone call, he painted a very worrying scenario that combines geopolitical unrest, surging oil prices, overly-loose monetary policy, and a tax disaster.

Here's what he said:

"The scenario that worries me is a geopolitical shock that spikes oil, and does so now, such as to remind people of what happened in 1973/1974, with the Yom Kipur war, when oil went from $3 to $12. I admit to being old enough to remember it. It did so at the same time [former Fed Chair] Arthur Burns was in a very expansive Fed policy mode. In 1973-1974, what the Fed did through monetary policy was to fuel the inflation that occurred in the late 70s and became virulent."

"On the monetary policy side [today], the policy is geared to blunt the force of deflation. The position of the Fed is: We'll deal with inflation later. And that's fine... when there is no shock."

"AIn a shock, when policy is very stretched, it means the system has no resilience."

"It's like jumping on a trampoline of cement."

"My worry is, the Northern piece of Nigeria is embroiled in civil war with Islamic extremists."

"Nigeria is the most important oil producer in the world."

"Geopolitical risk in Nigeria rises every day"

'Everyone is ignoring it."

"I look at Nigeria, and I look at the risk of Islamic extremism in

threatening oil production."

"My biggest fear is that we now get hit with an oil price shock... That takes Brent to $150-$160, and that takes gasoline hat to the High $4s or $5.00.

"That will come coincident with the expiration of the 2% payroll tax"

"And that plays a very important role here and is being ignored. And these idiots that we elect to represent us feel that it's okay to let a 2% tax break expire... at the same time a consumer shock is

underway."

So there you have it: Civil unrest explodes in Nigeria, oil soars to $150/barrel, gas surges to $5 gasoline, the Fed can't respond because it's stretched already, and the 2% payroll tax credit is left to expire.

Game over: Recession.