This is the bubble year. In the course of the business cycle there is a strange contradictory point, where the underlying economic activity of the economy has started to ebb, but the profits, piled up from the expansion, are still in the hands of businesses. These same businesses hold back on expansion plans, because interest rates and prices seem too high. It is only when consumer inflationary pressures abate, that there is an Indian Summer effect of the economy – expansion seems cheap, the economy seems "robust" and there is every hope of a "soft landing". To the brainless, it seems like a no brainer - expansion is cheaper, and it seems perfectly safe with robust consumer spending. Consumers too are acting strangely, because prices are down off the ceiling, pent up demand is exercised, creating a secondary wave of buying. Chart the course of retail sales and the NASDAQ on the way down in 2000-2001 and you will see people buying on what they think are "the dips".

However, the economy in such moments has already had a landing, and what is rippling through the economy is a gradual dominoe effect of contraction. Those who borrow to finance deals are happy, interest rates are relatively low, and so are premiums for risk. It is precisely at those moments where risk seems dead, that risk is greatest.

What follows is "the bubble" – a point where there is a rapid chase to cash in on the expansion with investment, but for an ever shrinking pool of opportunities. It is the time of big mergers, aimed at liberating cash on balance sheets or creating companies that corner a market.

This is the Bushconomy's bubble year.

Katrina created a landing for the economy – a burst of high inflation that slowed economic activity, and began the collapse of the housing bubble. The worrisome materials and commodities inflation that the oil spike generated is still working its way through the global economy – while oil is back to its demand model price, oil driven prices – such as grains – are still peaking, while oil driven materials – such as copper, are trundling their way down. But they are not going back to the relatively low prices of the early part of the decade, but to the merely overheated prices of 2004.

The reason spate of mergers and acquisitions is burning a hole through the heavy accumulated cash balances that we started the year with. The closing two months of 2006 liberated nearly half a trillion dollars – and now M&A is no longer looking at cash balances, but at available credit. This means that the end of the M&A and P-E boom is coming, because now the companies involved will not simply be stripped of cash – which is arguably not a bad thing, because if they were sitting on it, they weren't investing it – but laden with debt. Since according to various calculations about half of the S&P 500's borrowing capacity has been tapped, there is at least enough money to keep things going for another 12 to 18 months. Particularly if there are interest rate cuts.

This means that the predictions of recession are premature, while activity at the top of the economy alone cannot sustain an expansion for long, as macro aggregate demand, it can certainly do so for longer than seems reasonable. The market can stay irrational longer than bears can stay solvent. It is when the last megabear loses his last dollar that the fuel for the bubble is exhausted, like a dying star, the bubble will then fuse together more and more exotic forms of debt, until finally no further borrowing on borrowed borrowing is possible.

Many people write about recessions or the lack of recessions in moralizing terms. While people in public policy have this luxury, from the perspective of business,s the business cycle and it scomings and goings are realities outside of the control, but not outside of the understanding, of an ordinary businessman or woman. Fortunes have been made in downturns, and people have gone broke during booms. While it is easier when there is a strong updraft – Galbraith quipped that "financial genius is leverage and a rising market" – downturns have their important role. IT is often best to start a business, particularly an entrepreneurial one, during a down turn. Capital is cheap, people, even skilled people, particularly over mortgaged skilled people, are cheap. Office space is cheap.

However, managing the transition from bubble to contraction is one of the trickiest plays in business. Routinely the people who are most heavily rewarded by the updraft, because they bet on it the most recklessly, are the ones most punished by the downdraft. This is why it is generally best to decide which side of the wave you are going to ride, and accept the limitations.

For those riding the updraft, the time to move deal flow along is now. The next 18 months are going to be among the best ever to take leveraged or securitized cash outs. Deals that are going to be ready after that point will face the same problem as tech IPOs in early 2001 – perhaps the comapneis were better, but the environment was much worse. Low risk spreads are beginning to worry the high and mighty of policy, and that means that while there is almost certain not to be a real campaign of inflation fighting, the underlying macro-interest rate climate is going to continue to deteriorate.

The updraft strategy is to keep going until the last deal gets creamed, just as home builders are going to keep building homes until they take a blood bath on the batch that isn't selling. The key to winning the updraft strategy is to remember that bulls run, but pigs get slaughtered. Make sure that each cycle of deal leaves you with liquidity that is not tied to the next deal. People hear over and over again "pay yourself first" – and forget that that means taking profits off the table at each cycle. It is tempting not to, because it seems like the opportunity cost of not throwing that dollar back into the deal cycle is high, however, the reality is that the risk on each cycle gets higher.

The other part of the updraft part of the cycle is to soak up cash now, while the Japanese carry trade is still in tact. Target paper for that sweet spot on the yield curve – the five year. Since at the present time there is little interest incentive to borrowing for 10 years – why do it? Yes it improves cash flow, but you are still stuck with it.

What this boils down to on the updraft side is discipline – don't borrow interest only, don't borrow very long simply to be able to borrow more, don't forget to take money off the table, and make sure that deals move, and are moving quickly.

The downdraft strategy is to wait for the pigs to get slaughtered, and be liquid when everyone else is not. The key to a down draft strategy is flipping. Find assets, and flip them fast, stay one step ahead of the updraft people in finding pieces they need. And above all, stay out of debt that can't be liquidated. For the downdrafter, this is the time to be getting a very small core together for when the pieces will be lying around the shattered market, waiting to be put back together.

One of two scenarios will playout. One is that the bust comes in the nearer term, in which case you are ready to move on your plan. The other one is that the bubble rides longer than you think. In which case, there will be investment falling from trees, and the path to follow is to present the business plan in glowing and aggressive terms. But keep the key intellectual property in another entity, so that if the bubble turns to bust underneath you, you can cycle back through with the same idea.

The key for the downdrafter is identify what resources, precisely, you are waiting to bottom. Residential real estate will bottom before consumer real estate. Commodities will bottom before capital equipment. Remember that some segments of the economy will go into recession long before the others will. In the 1990's mining was in recession a full two years before the rest of the economy.

Just as the updrafters must tell themselves not to be heroes when the downdraft hits, downdrafters should not be taking out big leveraged bets on the timing of the collapse. There are very few people who have shown the historical ability to time the collapse. I remember that two days before I sold in 2000, a friend of mine told me "I got the signal that it is safe to get into the market." Instead, a better down drafter strategy is to have a thin stream of revenue in place, a stream that will make the business a good credit risk at the very moment that investment is drying up. This could be a side business, or a form of the business which sells consulting services rather than the final product, or even an obsolete product with a user base that will not switch in the downturn because money will be tight. Legacy can be good, particularly everyone will be husbanding cash.

The downdrafters however need one thing above all else – ideas. The next generation of ideas and products that will first, allow companies to survive the downturn, and then to flourish when credit starts returning to the economy – some 12 to 24 months after the contraction bottoms. This requires a longer term vision – after all, consider that the bubble has at least 18 months to run, then it will take 12 months for the contraction to bottom, and it could take as long as 18 months after that for their to be stimulus, and another 12 months before economic activity generally picks up – that's five years from now before an idea that is being readied today will see significant returns. But that is also not one month too many for the next round of visionary products.

Another time honoured downdrafter strategy is to provide liquidity for people that need to get out of overleveraged situations – the cram down. The hedge fund field is already seeing cram downs, as the bubble in hedge funds, caused by a wave of managers who jumped in over their own heads – as are parts of the residential real estate market. Planning a cram down play rests on three things – liquidity, metrics, and salesmanship. Money to buy people out, the targets to buy out, and the ability to tell people that are bleeding to death that you can make the pain go away. Since the cycle for this is 6 to 12 months before the cram down itself, targets of opportunity will appear and disappear if you are too reactive. Instead, pick targets that will suffer from the shake out, and then be there. The time to be shorting energy was months ago, the question is "what's the next play?" The answer is "what is reaching historic highs now? Which costs are going to fall as the falling cost of energy works its way through?

In summary – right now risks spreads are far too low for the systematic risk in the economy, even if the slow down in progress is not too severe, there are too many plays that are under hedged. Collapses in reinsurance and residual risk markets often destroy markets quickly, simply because the downside of these markets is virtually unlimited. Reinsurance and residual risk gets small amounts of money almost all of the time, and bleeds for a year out of every economic cycle.

The next year is going to see an increasing amount of activity driven by soaking off both cash on balance sheets, now nearing an end, and then tapping borrowing power. This may run as long as two years, or come to a screeching halt if some intervening event dramatically raises borrowing costs and risk premiums.

It is important to decide then, whether you are a bull, and are in position to put together deals that will mature quickly and be securitized quickly, or whether you are a bear who will be there to pick up the pieces. The bull strategy is take profits with each deal cycle, and to target deals to come to market within the 12 to 24 month time frame, realizing that the last deal is going to get slaughtered. The bear strategies are two fold. One is to pick targets in the collapse, and be ready to cram down the people who bought at the top, flipping the asset into a falling market. The other is to form a core, realizing that at some point the resources – capital and human – for expansion will be cheap, so long as the company has a stream of revenue to be able to borrow against when that comes.

Few people manage to do both, simply because one requires a relentless optimism to get people to pull the trigger now, and the other an unshakeable patience, as you wait for the market to sink down to your price.

But in either case, it is important to realize that the hype about a "soft landing" and about an imminent recession are both merely tools to be used. Those buying a soft landing, need to be pushed for updraft deal flow, those fearing an imminent recession, need to be crammed down to get out. But in reality, the next year will confound both predictions, because both are going to be going on at the same time – a small sliver of frenzied deal flow at the top, and an increasingly sluggish economy at the bottom. Decide who you are dealing with and act accordingly.