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Markets

Investing Wild Cards for 2007

Here are five things that could go wrong (and the latest odds that they will).

With the Dow Jones industrial average regularly hitting record highs in November, investors seem convinced that the economy is in Goldilocks mode -- not too hot, not too cold. But before you get too complacent, consider some of the potential economic and political risks to this sanguine scenario.

Geopolitics. It's a dangerous world out there. Think of Iran, Iraq, Lebanon, Pakistan, North Korea and Venezuela, not to mention a resurgent, oil-emboldened Russia seeking to flex its muscles. Heightened global tensions involving any of these countries could torpedo the stock market. The odds: 30%.

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Oil. Terrorism in the Persian Gulf or instability in a major oil-producing nation could easily send oil prices shooting up to $100 a barrel. The stock market would not like that. Odds are 30%.

Recession. We're not forecasting an economic contraction. But given falling housing prices and rising gasoline prices, a recession isn't out of the question. If that happened, corporate profits would tumble, and stocks would certainly suffer big losses. The odds: 20%.

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Inflation. Core inflation -- excluding volatile food and energy prices -- rose at an annual rate of 2.2% in 2005 and 2.4% for the first nine months of 2006. That's making the Fed nervous. Strong wage gains or higher oil prices could force the Fed to raise interest rates, upsetting markets. Odds are 35%.

Dollar doldrums. Our yawning trade and budget deficits could spook foreign holders of the greenback. A collapsing dollar would boost inflation and force the Fed to jack up interest rates to defend the currency. The odds: 10%.