On July 26, Bloomberg highlighted the Federal Reserve report as saying that, "high food and energy prices are restraining consumer spending, which accounts for about two-thirds of gross domestic product."
As America is still a massive consumer market for world wide products, we believe any turn-down will affect international markets, the current stars of growth.
In short, we feel that a major recession in America will be felt around the world.
[Editor's Note:The Mother of All Financial Disasters]
We feel that consumer spending will result in depressed holiday sales at the end of this year, with a major adverse impact on projected future corporate earnings.
The recent stock market boom was based largely on increased corporate earnings.
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As if that were not enough, the Bloomberg reports that, "Home sales in the U.S. probably fell for the fourth straight month in June, a sign housing remained mired in the worst slump in 16 years going into the second half."
As one example of this, Bloomberg reported the Beazer Homes USA Inc. posted a third quarter loss of $123 million versus a profit of $103 million a year earlier.
In announcing their results, Countrywide indicated that problems were not restricted to sub-prime credits.
[Editor's Note:4 Foreign Currency Plays to Beat the Falling Dollar. ]
So, the key point is that, the sub-prime mortgage crisis appears to be spreading, just as we forecast.
In the meantime, there is a flight to capital. The prices of corporate bonds plummet while those of Treasuries rise.
Just today, Bloomberg reported that the Australian-based company, Absolute Capital Group Ltd., yet another hedge fund that invested in collateralized debt obligation and which is 50 percent owned by AMN Amro Holding NV's Australian unit, had suspended withdrawals.
Then we have the severe erosion of confidence in the credit markets that we have long feared.
Bloomberg reported that, "The risk of owning corporate bonds soared after a hedge fund owned by ABN Amro Holding NV's Australian unit suspended withdrawals…"
Bloomberg also reported that most worrying item that, "Yesterday, Chrysler and Alliance Boots Plc failed to find buyers for $20 billion of loans to pay for their buyouts." This left 10 banks holding the paper.
We wonder if the banks, including JP Morgan Chase & Co., had calculated this and other similar loans in their recently enhanced loan provisions.
Meanwhile The Telegraph reported that the Bank of Italy is considering bailing out the Italease bank and is reviewing, "Italease's disastrous bets on leveraged credit futures."
As we have long advised, we feel the housing bust will prove to be both longer, deeper and more international than most market pundits appear to think.
We have written often about the massive liquidity that appears to shore up markets, while domestic profitability has fallen and inflationary pressures continue to threaten.
Now it appears that despite the siren voices of our government officials and Wall Street and their media, the sub-prime situation has indeed spread and caused a serious erosion of confidence in the credit markets.
We fear that this erosion of confidence, reflected around the world by a falling dollar may trigger a massive unwinding of highly leveraged liquidity, world wide.
Mark you, all that has happened to date has happened with the financial markets believing our government's "cooked" book on inflation!
Can you imagine what will happen when stealth inflation is exposed and interest rates rise several points, to reflect financial reality?
[Editor's Note:Bernanke Reveals `Fiscal Crisis` Ahead]
Our fear has always been that should this happen, it will hit consumer demand, home prices and financial institutions, with the implications echoing worldwide.
However, these things do not usually happen in straight lines. For instance, we fully expect the markets to show "bounce". But each bounce is likely to be less strong as a prelude to a real fall.
We have been bearish for many months and have urged "preservation" of capital over "increasing" capital.
We understand that this strategy was frustrating as we saw the markets boom on a wave driven, not by fundamentals, but by massive liquidity-based transactions (LBO's M&A's etc); market hype; and the fact that most of the bears have left. Today's markets appear to be a one-way street, made up exclusively of buyers.
We have urged patience.
Now, we feel our readers should consider putting some of their cash to work, with a view to increasing their capital, by investing, on the downside, which is in market-short ETF's while placing a Stop Order, as insurance.
Editor's note:
Bernanke Reveals `Fiscal Crisis` Ahead
The Mother of All Financial Disasters
4 Foreign Currency Plays to Beat the Falling Dollar.
What Happens When Easy Money Disappears? 12 Ways to Profit.
