With jitters on Wall Street having picked up in the last month, now is a good time to consider what the next recession/ economic downturn will look like.

There are certainly a lot of theories out there from the bears, and we should consider the possibility of each of them, at least if they are reasonable.  When Harry Browne was advocating his permanent portfolio approach, he would make a point that one should not consider whether a scenario will happen, but whether one is properly prepared if such a scenario were to happen.

We can mostly discount the theories that have almost no chance of taking place.  And there are some theories that, if they did come true, there would be no point in preparing for anyway.  If someone is predicting all-out nuclear war that will blow up the world, what is the point of worrying about it?

There are a few out there who predict that hyperinflation of the U.S. dollar is right around the corner.  I won’t say this is impossible, but it is highly unlikely in the near future.  And in the unlikely event that it did come true, I’m not sure that I could prepare for a complete breakdown in the division of labor as we see in Venezuela.  The people who predict hyperinflation are probably not taking their own predictions seriously.  Otherwise, they wouldn’t be blogging about it.  They would be moving out of the country or finding a rural retreat stocked with canned foods that is out of sight.

There are predictions that I see that I don’t agree with in the sense that I don’t think they are likely.  But at the same time, I don’t think they are highly improbable either.

For example, there are many libertarians who are predicting a spike in interest rates in the near future.  I do not see this as likely.  Or if it does occur, I think it will be short-lived.  Unless price inflation fears dramatically pick up, then I believe that investors will run to U.S. government debt for safety in an economic downturn, locking in longer-term rates, thus driving yields down.  While interest rates have gone up a bit recently, they are still relatively low.  I believe they will stay relatively low until we see a significant threat of substantial price inflation.

However, I could end up being wrong.  Therefore, I look at my own financial situation and see if such a scenario would be damaging to a great degree.  Since I have a fixed-rate mortgage, and my investments would stand up relatively well in a higher interest rate environment, I don’t have to worry excessively if such a scenario unfolds.

With all of that said, I would like to emphasize that the next recession won’t look like the last one, which was the financial crisis circa 2008.  There will likely be similarities, but history almost never repeats exactly.

If I had to guess, I don’t think the banks and financial institutions will be in as much trouble this time.  The banks were bailed out in 2008, and they continue to be bailed out to this day.  They are collecting 1.5% on their reserves, which is the Fed’s way of maintaining its federal funds rate target.  It is also the Fed’s way of secretly bailing out the banks.  The good news is that they should not need as much bailing out next time.

We also won’t have a housing bust to the same degree as a decade ago.  Housing will certainly take a hit in a recession.  It will obviously get hit harder in the real bubble areas, such as San Francisco.  But in most areas, housing prices are not where they were in 2006/ 2007, and that is with a significantly higher monetary base now.  Therefore, I don’t think the fall in real estate prices will be as bad, which means fewer defaults next time for the banks.  Of course, the defaults from car loans could end up being worse.

As far as stocks go, they could fall even further than what was seen in 2008/ 2009.  Stocks are likely a giant bubble, and we don’t even know if they have already peaked.  We could still see another run higher before the final collapse.

And as I’ve already said, I think interest rates will fall in the recession.  This means that U.S. government bonds are still not a completely ridiculous investment.

Gold is much harder to predict, but my best guess is that it will be similar to 2008/ 2009 where it takes a dive as the U.S. dollar strengthens.  But if QE4 comes, then all bets are off and gold will likely zoom higher.

We could end up seeing $2 trillion annual deficits.  This would have been unheard of 10 years ago.  But Congress may run a $1 trillion deficit next year, even if we don’t go into a recession.  I don’t know when or how this will all end, but it will end eventually.  That is what happens to things that can’t go on forever.

These are just my thoughts, but of course we can’t know how millions of people will act in the future, let alone a few hundred politicians and central bankers.  We can only guess what is likely in the big picture.

Instead of trying to predict exactly how things will play out, the most important thing you can do is to ask yourself whether you are prepared for any somewhat likely scenario.  If you are particularly worried about a particular scenario because you are vulnerable, then work to fix that vulnerability.  You can only control what you control.