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Credit Bubble Bursting to Lead to Across the Board Asset Price Deflation

Stock-Markets / Credit Crunch Dec 12, 2007 - 01:31 AM GMT

By: Christopher_Laird


Best Financial Markets Analysis ArticleRiding upon the greatest credit bubble in history, greater than anything ever –(my interpretation of Doug Noland) one has to wonder what the future holds, if that bubble is breaking. That bubble includes the greatest housing bubble in history, the greatest world stock and bond bubble.

Just for the US housing bubble, it is estimated that, in a mere 5 years since 2002, $5 trillion was both pulled out of US housing and also the housing stock rose that much in value. $10 trillion total.

Now that the unraveling begins, one wonders, have we seen  the bottom or only the beginning?

Well, judging from the ever expanding credit collapse worldwide, the answer is, we are seeing the beginning. If there is a hiatus' in 08, it's only to delay the inevitable. A delayed credit crisis and deleveraging worldwide. But, if it's not delayed, then look for a great world stock crash in the first half of 08.

I'm not talking about a 10% correction from where we are now, 13700 on the Dow, or other world indexes also at highs (sans Japan which hit a high in the late 80's early 90s' at about 45000 on the Nikkei).

I'm talking about a more than 30% drop in the Dow and world stock indexes. If that happens, you can be sure the commodity complex, including oil will drop that amount.

Then, we are talking about the aftermath, maybe a depression. Maybe, a massive world financial and real assets deleveraging. There are already signs of this happening. Take the massive world credit contraction. Take the serious US and UK housing bubble collapses.

Remember, the present world financial markets, commodity markets, real asset markets, and bond markets, are all at record highs, due to the incredibly cheap credit from the US and Japan during their ultra low interest rate regimes in the early part of this decade. Japan actually started this in the early 90's with their half percent or lower interest rates to combat their stock and real estate crashes just after '90. 

A case can be made we are merely working out the natural evolution of those crashes, and in the US, we had a follow on crash in 2000, 01. Then the massive US version of a Japan type deflation battle, with US interest rates dropping to 1%, and the massive US housing bubble that followed.

In Japan's case, that ultra low interest rate regime failed because the Japanese consumer is averse to borrowing. Not so the US consumer, who bailed the US out of recession after 2002, and then the world, with a gangbusters world economic boom – fueled on credit.

Of course, that credit regime was so loose that we now have $5 or 10 trillion worth of new debt on the US consumer, not to mention all the rest of the West, the UK figures here, and all the rest of the West.

Now that we see weekly deterioration of world credit markets, like this week, Societe bank in France taking on $ 4 billion of bad SIVs because they were about to be forced into a fire sale, HSBC taking $20 billion of more bad mortgage derivatives onto their books, too last week or so, Banks bailing out their money market funds, (at least so far) lest panic flight appears, like the Florida mess, BoA freezing a big fund this week from withdrawals.

Central banks lowering interest rates to combat the freezing CP markets, the rising Libor rates that determine what US ARMs reset to… the US Fed and ECB putting out so far $1 trillion in emergency financial market liquidity since August – in my estimation.

Or else see the entire banking industry in the EU and US collapse.

We are on the verge of a gigantic world financial deleveraging. The credit market's paralysis shows this.
If all this does not abate, we are going to see a huge stock crash in 08. We will see commodities fall 30% from their record highs this year. We will see gold do a temporary 20% fall (maybe only a few weeks window at those prices, then a recovery in flight to gold for financial safety).

It would seem that 07 was a dress rehearsal. What will 08 bring?

I have heard all the typical market timing arguments, that the Chinese won't let markets tank in 08 cause of the Olympics. The US won't allow a market crash cause 08 is an election year. I don't think that is going to stop what appears to be a huge world stock crash that is getting ready to happen, due to the uncontrollable world credit collapse. In early 08, we will definitely see corporate earnings dropping, and world stock markets will take that as the cue to sell off hard.

We probably have peak everything right now. 

This week's PrudentSquirrel Sunday newsletter has a general discussion about some ways to protect your savings. Prudent Squirrel subscribers also get mid week email alerts. We have anticipated the 5 major world stock and gold drops this year by up to a week in those alerts.

Stop by and have a look. 

By Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

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