John Mauldin sees a very risky next six months, risk trade back on!

What on earth is happening in financial markets? Risk on? Risk off? Debt downgrades pending for sovereigns that might even include the USA, let alone Greece, Portugal and their fellow sufferers.

Doyen of the financial newsletter writers John Mauldin, with over a million signed up to his free e-letter, is warning of a ‘very risky six months’ ahead.

Long-only risky

He says: ‘I would be very careful about any long-only trades, whether it be stocks or commodities or bonds. We just don’t know – there is less certainty than at almost any time I can remember.’

Mr Mauldin is not alone in worrying about the eurozone sovereign debt crisis being far from settled. Last week’s vote in the Greek parliament was just another act in this sad tragedy that is far from over, even if we are all bored stiff waiting in our seats.

The latest e-letter borrows a couple of graphs from Bloomberg to make a serious point about the US economy. First low growth could easily deliver the US back into a recession as it always has when growth goes below two per cent:

Then there is the generally reliable Economic Cycle Research Institute Index that is close to rolling over:

Could the next six months deliver the global economy back into recession in 2012? That is what Professor Schiller of the housing index fame thinks. But politicians would surely move heaven and earth to ensure it did not happen in a Presidential election year.

You have to wonder if a QE3 will not be pulled out of the hat? Will it then actually work? The evidence from QE2 is not good. Meanwhile, the Europeans increasingly look like the boy with his finger plugging up the dyke that will not hold.

Is this a time to go short in the market? Dr Marc Faber thinks it is too early. The ArabianMoney newsletter has recommended some short ETFs that will profit if markets sink (subscribe here).

Short ETFs are a low cost way of maintaining a short position but naturally lose money if the market goes in the opposite direction. They can also be very useful as hedges, say to a large precious metals position if you are unsure on the immediate direction of this market too.

But when we see John Mauldin flying the red flag this is a warning we would take seriously.