Major Market plunge a symptom of Coming trouble
Pastor Dale Morgan
Major Market plunge a symptom of Coming trouble*
Experts had expressed concern over global credit bubble
Posted: July 26, 2007
The Dow Jones Industrial Average fell 311.5 points today to close at
13,473.57 in a broad market sell-off that at the market low for the day
saw the DJIA down over 400 points.
It was the second major market plunge this week. On Tuesday the Dow
Jones fell 226.47 points, closing at 13,716.95, even though the average
closed just a week ago for the first time ever over 14,000, at
14,000.41, after a gain of 82.19 points.
Market Plunge Predicted
The stock market bubble could burst, especially if the collapse in the
sub-prime mortgage market spilled over into the stock market.
On a Jan. 31 letter written by the Carlyle Group's founding partner and
managing director, William E. Conway, Jr., to the firm's investment
professionals worldwide.
Conway warned the firm's investors to anticipate that the continued rise
of world stock markets due to a glut of liquidity in the world financial
system would not last forever. When the liquidity bubble finally burst,
Conway expressed concern that the resulting U.S. recession could become
a major worldwide recession.
Debt Bubble Bursts
Robert Chapman, the author of the International Forecaster, an economic
newsletter with an international audience estimated to number over
100,000 readers, warned in his newsletter on July 25, that, "We face a
collapse in real estate and then in the stock market, which are parts of
a larger banking crisis."
For months, Chapman has been cautioning that the dot.com bubble burst,
followed by a burst in the real estate bubble, and that now the global
debt bubble is an issue.
For over a year, Chapman has predicted a collapse in the heavily
leveraged $1.4 trillion dollar unregulated hedge fund market and in the
little-understood derivative market where leveraged exposure may be as
high as $500 trillion.
The decision of the Federal Reserve to quit publishing a traditional
index, "M3," that has been a broad measure of the money supply, signaled
a decision by the Fed to pump the economy with excess liquidity.
Since the Fed quit publishing M3 data, economists who have attempted to
re-create the index from other available data have estimated that M3
data would today be reporting upwards of a 10 percent increase in the
money supply, a level that would be considered high by historical standards.
"Liquidity" is defined by economists as money available in all forms to
be given out as debt, ranging from credit card debt, to mortgage debt,
to large quantities of institutional debt that is typically used in
complex financial transactions such as highly leveraged corporate
acquisitions.
Excess liquidity, as reflected in the rise of highly leveraged hedge
fund accounts, has been widely attributed to be a major factor in the
rise of the stock market in the recovery since 9/11.
Chapman now estimates that credit markets are in the grips of a
"borrowing mania assisted by the Federal Reserve. U.S. leveraged buyouts
have pushed the sales of high-risk, high-yield debt paper up 70 percent
to $1 trillion during the first half of this year."
Dollar Hits Historic Lows
In the last two weeks, the dollar has hit a series of historic lows
against the euro. On Monday the euro rose as high as $1.3851, an
all-time high.
Meanwhile the dollar has been closing at or near 80 on the U.S. Dollar
Index, dangerously close to dropping below this technical support point,
possibly on the way to a new, lower support point in the 70s.
Chapman estimates that "the U.S. Treasury and the Fed will make a last
ditch attempt to defend the dollar between 70 and 80 on the U.S. Dollar
Index." From there, Chapman sees the dollar as falling as low as 72 to
75, with the very real possibility that a low of 55 on the U.S. Dollar
Index could be "a reasonable correction."
Impact Hits Home
When the credit bubble fully bursts, values in the home market may be
further depressed, driving down even more the value of homes across the
United States.
Chapman's conclusion for the average American is not optimistic.
"This means you may not be able to get a home equity loan now," he wrote
in his July 25 newsletter, "or that your retirement savings will grow
more slowly or not at all."
Chapman advised his subscribers that gold was one of the few secure
asset classes he was recommending for investors.
Further Downturn Predicted
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 sums up his concerns about the likely bursting of the liquidity
bubble as, "Debt upon debt, leverage upon leverage – the sub-prime real
estate loan problems are symptoms of bigger issues."
Williams estimates that the mountain of collateralized debt created by
Wall Street – including mortgage-backed securities, asset-backed
securities, collateralized debt obligations, or related derivatives –
are a small part of a much broader derivatives market that may now
amount to $415 trillion according to the Bank for International Settlements.
These complicated and difficult to understand debt investment
instruments are likely to devalue or even default in a global market
liquidity contraction that we may now be beginning, as witnessed in this
week's DJIA market collapse.