Montreal, Canada.

Will this be a V-shaped or a W-shaped economic recovery?

Increasingly, the odds are growing that the United States will encounter a W-shaped recovery process -- not unlike what occurred in late 1937 following four years of economic recovery off the 1932 lows.

Nouriel Roubini, one of the few economists and forecasters to successfully predict the 2007-2009 U.S. credit crisis, recently warned of the growing risks facing the recovering American economy. You can read his latest editorial in the Financial Times (August 24, 2009, page 7).

Roubini claims the odds are rising that the United States will enter a double-dip economic recession next year as the Fed and other central banks possibly prematurely reduce or dismantle unorthodox money-market operations threatening the budding recovery. "One reason to fear a W-shaped outcome is that oil and food prices are increasing faster than fundamentals warrant," according to Roubini.

Among other important obstacles facing a normal post-recession V-shaped recovery is the clog in bank lending that has yet to unwind. "This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialized and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest."

Roubini also doubts that we'll see a perfect transitioning from current massive government stimulus to private sector consumption by next year as this round of fiscal spending is exhausted: "The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending."

After crashing in late 1929, stocks thereafter hit a final low in the summer of 1932 resulting in a cumulative 89% decline from the October 1929 peak. It took 27 years from that peak for investors to break-even – in nomimal terms or before inflation. But the low in 1932 held and investors earned more than 400% in stocks before the stock market and the economy tanked again starting in 1937.

Thus far, the S&P 500 Index remains 34% off its October 2007 all-time high. From its low on March 9 the American broader market has gained 53%, excluding dividends. If history is any guide, the stock market can muster more gains before this bear market rally is truly over.

Is this more like 1933 or 1936? The next few months should be interesting and especially volatile. The latter by the way – volatility – is now on Sale. The VIX has plunged almost 40% this year and offers a great speculation for those investors looking to hedge their stocks from rising volatility this fall. The CBOE VIX option or the exchange-traded VXX or iPath S&P 500 VIX Short-Term Futures ETN are probably the best punts in the market now following big gains for risky assets since March.