"If global policy makers could focus on structural as opposed to cyclical financial solutions, new normal growth as opposed to recession might be possible."

That’s a quote from the latest Investment Outlook from PIMCO’s Bill Gross. (As an aside, Gross’ Investment Outlooks are posted to his website on the first of every month, and they are always an entertaining read.)

It should be clear what Gross is talking about. Simply cutting won’t fix the global economy. In fact, according to Gross’s statement, cut spending to reign in debt and you get recession. This is as true for Greece, where the economy has been shrinking +5% for two years, as it is for the U.S.

Is the U.S. in recession? Despite some who say it is, the latest manufacturing reports show growth, perhaps as strong as 2%. The U.S. economy isn’t contracting. Not yet…

But Gross is telling us that if we continue to push austerity, without any measures aimed at growing the economy, we will see recession in the near future.

Now, Gross has come down on government spending as hard as anyone. And as a bond investor, he stands to benefit as investors seek out the safe-haven of bonds in a recession. So I don’t think Gross is talking his book here. He’s serious – our current course leads to recession and everything that comes with it: higher unemployment, lower home prices, and a crushed stock market.

It may seem like we’re getting most of those recession goodies already. But don’t worry: things can always get worse.

Stocks started the first day of the fourth quarter to the upside. But the early strength gave way to another disappointing day. We’ve seen several rally attempts fade over the past couple of weeks.

Yesterday, a new round of bank earnings revisions from Nomura reminded investors that the economy stinks and reversed the early gains.

However, one stock market statistic is forecasting a rally: the Volatility Index or VIX. The VIX measures how much investors are paying for S&P 500 put options to protect their portfolios, or to simply speculate on more downside. The assumption is that the premium on these put options rises as more investors become convinced that more downside is right around the corner.

And we know what happens when everyone piles onto one side of the boat.

The VIX is a contrarian indicator. High VIX readings tend to coincide with market bottoms and upside reversals. The VIX rose 160% in the third quarter, to 43. Yesterday, it’s hit 45.

James Paulsen, chief investment strategist at Wells Capital Management, which oversees about $340 billion, told Bloomberg this about the VIX:

"A very high VIX level suggests investors have given up, they’re out of the way, and that’s a great entry point. It’s a contrary sentiment indicator, so when the VIX surges, it says bearish sentiment verging on panic is surging. And the market’s a good buy."

The first time the VIX ever went above 40 was in 1998, after the Asian financial crisis. Stocks rallied 22% in the next 3 months. He VIX hit 41.76 a few days after 9/11. Stock gained 9% in the next few months.

I know, it’s always hard to buy stocks when they are at (or near) lows, but we should expect a rally sometime soon. oil and select tech stocks should be targeted.

The market is getting more certain of Greek default every day. I’m not sure why there’s still uncertainty surrounding Greek default – it’s been the only reasonable option for a while now.

The EU needs to get busy and make it, or let it, happen. That means recapitalizing the Euro-banks so they can withstand the inevitable damage to their balance sheets.

It needs to happen soon. The stock market is weary. And so are investors.

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Published by Wyatt Investment Research at