Mega-terror threats add to stock market woes
Pastor Dale Morgan
Mega-terror threats add to stock market woes*
Worldwide financial contraction would be aggravated by attack
Posted: August 16, 2007
A balloon of no-money-down home loans and easy credit for corporate
buyouts, followed by the perfect storm of inflation and declining home
values, has set the stage for what economic experts believe could end up
a literal "meltdown" in the global economy.
It's the result of a combination of factors, but some warn that as bad
as it is – Wall Street has lost about 10 percent of its value in the
past few weeks – it would undoubtedly be aggravated by a major terrorist
attack, which would create tremors felt by millions.
"We've never had a crisis like this while we're at war," said Craig R.
Smith, president of Swiss America Trading, and an expert on financial
issues including tangible assets.
"Homeland Security is warning [about the potential] over the next two to
three weeks of another terrorist attack," he said. "If we are hit with
terrorism, it would send these markets into a tailspin. Consumers
already are nervous and fearful that they're going to lose their homes,
that their 401k [retirement fund] will be chopped in half."
"Osama bin Laden knows how delicate the system is," he added. "If there
was a small dirty bomb attack, or a homegrown cell attack, we would have
a meltdown on Wall Street," he said.
A new warning from the Stratfor terrorism intelligence report echoes
Smith's concerns about an impending attack.
"One of the reasons for the heightened concern," the report said, "is
that most everyone … is surprised that no major jihadist attack has
occurred on U.S. soil since 9/11. Many plots have been disrupted, and it
is only a matter of time before one of them succeeds. Simply put,
attacks are not difficult to conduct and the government cannot stop them
all."
The organization said it believes al-Qaida retains its ability to
conduct "tactical strikes" but probably cannot pose a "strategic threat."
"While this may be reassuring on one level, people can and will be
killed in a tactical strike. The fact that an attack is not
strategically significant will provide no immediate solace to those near
the carnage and confusion of a tactical attack," the service said.
Such an incident could prompt a 2,000-point drop, Smith suggested.
"For the first time in the last 25 years, I'm trying to figure out what
to do," he said. Important, he said, is an absence of panic on the part
of consumers, and he suggested one shouldn't make major investments or
divestments with that attitude.
Jerome Corsi, a Harvard political science PhD who has written several
best-selling books, collaborated with Smith on "Black Gold Stranglehold:
The Myth of Scarcity and the Politics of Oil." He agreed that the
meltdown could be severe.
The two documented in the book that Americans consume more than 25
percent of the world's oil but have control over less than 3 percent of
its proven supply. This unbalanced pattern of consumption, they assert,
makes it possible for foreign governments, corrupt political leaders,
terrorist organizations and oil conglomerates to place the citizens and
the economy of the United States in a stranglehold of supply and demand.
"The bursting of the mortgage bubble and the bursting of the worldwide
credit bubble have caused a major worldwide meltdown in credit markets,
which has slipped over into the stock market," Corsi said regarding the
current situation.
He said the expansion in recent years of the available of credit
literally abandoned a more "disciplined" approach that would have held
down borrowing.
"You've had subprime loans wildly out of hand and commercial paper which
… should have been rated junk bond status but has gotten rated much
higher than that. There have been leveraged buyouts that never would
have happened but there was available credit," he said.
"Hedge funds have had wild access to credit. A pool may have a billion
dollars worth of assets … but may borrow 10 or 20 times that," he said.
"When the stock market goes up, everybody wins, they can pay the
investors, make a nice profit. But when the market adjusts downward …
the underlying assets drop in value."
Some of those fund investments will end up being literally worthless, he
said, with its resulting impact on the market.
"The losers are going to be anybody who has these funds: banks, pension
funds, institutional investors. They're going to have to take trillions
of dollars in losses," he said. "It's hard to see where the bottom is
going to be."
At the consumer level, such conditions can produce tragedies, Corsi
said. Perhaps a consumer purchased a house for $167,000, but wasn't
really qualified so borrowed 100 percent of the value of the home at
that time – on a variable interest rate loan.
Now with inflation, the interest rate and payment will rise. At the same
time neither the consumer's income is likely to rise, because of tight
economic conditions, nor is the value of the home likely to rise,
because of a depressed market.
And now the home is worth only $157,000, so the consumer cannot even
sell out to pay off what is owed.
Corsi warned that the "unconscionable credit party" held in recent years
will result in "hundreds of thousands" at risk of losing their homes.
Smith, whose company has grown from a $50 startup to accumulate sales of
half a billion dollars, said the current situation has taken years to
develop, and could take much time to solve. He said the beginning was
when consumers switched from the old-fashioned save-up-$200-and-buy-a-TV
attitude to picking it up now and paying $19 a month.
As the use of credit expanded, people who did not pay their bills on
time were targeted by those who accepted a higher risk, and the subprime
market was born. In recent years, as the Federal Reserve has allowed
conditions that generated huge amounts of credit, those loans were made
to consumers on homes – often at 100 percent or more of the value of the
collateral home – as well as corporate buyouts.
Hedge funds and other investment entities then bought up bundles of
those loans.
But when the combination of inflation and declining property values
started hitting individual consumers, the crunch became intense for the
investors.
A French bank, BNP Parabas, recently said it was shutting down
redemption of some of its funds because there was no way to determine
the value of the underlying collateral, so it couldn't set a value for
the investments.
"What you have happening, with all of these market factors converging,
is that investor confidence is totally shattered," Smith said. "People
thought you could put money in the stock market and it would stay. We've
blurred the line between savings and investments. If you put $1,000 in
the stock market, that's not savings, that's an investment."
Then hedge funds, he said, "used Wall Street as a casino."
He said it's the first time he's seen the influences converging as they
have at this point. And it's worldwide, affecting markets in Europe,
China and other areas, in addition to the U.S.
"There's a huge contraction going on," he said.
Robert Chapman, author of the International Forecaster, an economic
newsletter with an international audience estimated to number over
100,000, warned in his July 25 newsletter, "We face a collapse in real
estate and then in the stock market, which are parts of a larger banking
crisis."
Chapman has warned for months that just as the dot.com bubble burst,
followed by a burst in the real estate bubble, now the global debt
bubble is an issue.
Specifically, for over a year Chapman has predicted a collapse in the
heavily leveraged $1.4 trillion dollar unregulated hedge fund market and
the little-understood derivative market where leveraged exposure may be
as high as $500 trillion.
As was has previously reported, John Williams, an econometrician who
publishes the website Shadow Government Statistics, has been predicting
an economic downturn.
"The dollar could lose as much as 30 percent of its value in 2007,"
Williams said that in January. "In 2007, we are likely to see the
economic downturn of 2006 develop into a structural recession and yet we
have international trade and federal budged deficits careening out of
control."
"Against the backdrop of intensifying inflationary recession, the dollar
has started taking some early and heavy blows," Williams writes in his
current subscriber newsletter. "The sub-prime mortgage difficulties have
gained media prominence, but they are just the beginning of difficulties
for mortgage and other asset-backed securities."
Williams summed up his concerns about the likely bursting of the
liquidity bubble this way: "Debt upon debt, leverage upon leverage – the
sub-prime real estate loan problems are symptoms of bigger issues."