Credit Crunch of 2007 Turning Into Credit Collapse of 2008
Stock-Markets / Credit Crisis 2008 Mar 10, 2008 - 02:11 PM GMT
The Credit Collapse of 2008 has begun. The place is every home, business and government. The time is now.
The credit collapse is not just an ordinary recession that repeats itself with each new business cycle of the 21st century. Nor is it the Great Depression returning to haunt us from the depths of the 1930s.
The credit collapse is a sudden surge in debt defaults by borrowers ... and an equally sudden disappearance of new loans by lenders.
It's an unprecedented surge in home foreclosures ... and an equally unprecedented cutback in new home mortgages.
It's causing unexpected corporate bankruptcies ... plus equally unexpected demands by banks to put up more collateral.
It's threatening to sink businesses, paralyze local governments and gut the investment portfolios of millions of Americans.
It's even starting to sabotage the best laid plans of government — neutralizing the Fed's interest rate cuts ... pre-empting Congress' economic stimulus plan ... and threatening to strip Washington of its traditional powers to fight a recession.
And I'm not the only one who sees this.
Yesterday's New York Times reports ...
- that the government's usual fiscal and monetary policy tools are failing ...
- that this failure is raising questions about what more the Fed can do, and ...
- that its actions so far have done little to counter sinking housing prices, the falling stock market and disappearing jobs.
"The Fed's main weapons against a downturn," says The Times , "are ill-suited to a crisis that stems from collapsing confidence about credit quality."
Meanwhile, economist Edward Yardeni, formerly still holding to the theory that the economy was OK, has now reversed course. Ditto for economists at JPMorgan Chase and Lehman Brothers.
They don't yet call it the Credit Collapse of 2008, as I do. But they see it just the same — and they are beginning to recognize how serious its consequences really are.
What they may not yet recognize is that the Credit Collapse of 2008 could attack everyone and everything that depends on debt, including, ultimately, the U.S. government.
And it's moving fast!
Just in the past three months, we've seen the Credit Collapse of 2008 drive a dagger into the markets for prime home mortgages, commercial mortgages, business loans, student loans, credit cards and municipal bonds.
We've seen the credit collapse rip apart little-known-but-important "structured" securities — Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Collateralized Debt Obligations (CDOs), Collateralized Loan Obligations (CLOs), Auction Rate Securities (ARS), Credit Default Swaps (CDS), Structured Investment Vehicles (SIVs) and Variable Interest Entities (VIEs).
And just last week, to the shock of federal authorities, the credit collapse struck bonds issued by Fannie Mae and Freddie Mac. Although not backed by the full faith and credit of the U.S. government, these bonds were thought to be immune from the crisis because of their special status as government "sponsored" agencies. But they weren't.
The New York Times puts it this way: "If investors lose confidence in Fannie Mae and Freddie Mac, which have become the only major remaining source of mortgage financing in recent months, Fed officials fear that homes sales and housing prices could plunge further and foreclosures could climb even higher than they already have."
Plus, there's still another , unspoken fear:
If the Credit Collapse of 2008 can slam into the market for government- sponsored bonds, could it not do the same to government agency bonds like Ginnie Maes, which are backed by the full faith and credit of the U.S. government?
Further, if the Credit Collapse of 2008 can hit agency bonds, then, at some point, could it even bring down long-term U.S. Treasury bonds?
Fed officials are afraid to give an answer. They're even afraid to ask the question. But on Friday of last week, March 7 ...
They Could Wait No Longer. They Were Frightened. And They Panicked.
In a desperate attempt to avert a full-scale collapse of credit markets, the Federal Reserve declared it would offer ...
- An unprecedented $100 billion in long-term loans, accepting virtually any kind of debt instruments as collateral — including bad paper that's at the core of the credit collapse.
- An equally unprecedented $100 billion in short-term loans, accepting Fannie Mae and Freddie Mac bonds as collateral.
- Plus, as much additional funding as needed to ease the pain for the next victims of the credit collapse, whomever those may be.
That's a heck of lot of new paper money flooding into the banking system — especially considering that it stems from economic weakness, not strength ... and that it comes in the form of devalued paper, not wealth.
As a direct result ...
The U.S. Dollar, Already Beaten Down to Its Lowest Level in History, Was Hammered Again!
The dollar dropped for a fourth straight week of consecutive all-time lows against the euro ... plunged to an eight-year low versus the Japanese yen ... and even fell against most Third World currencies.
Last year, we told you this was going to happen and we gave you the script that is now unfolding act by act.
- We warned you about a watershed event — a bust in the dollar below its all-time lows reached in 1992. And that event took place.
- Next, we told you the dollar would sink into a virtually unstoppable free-fall. And it did.
- Plus, we explained that the dollar plunge would drive commodities through the roof. And it has done just that:
Gold has surged to within a hairline of $1,000 per ounce.
Crude oil skyrocketed on Friday to a new, all-time high of $106.54 per barrel, nearly triple its previous all- time high ... even higher than its inflation-adjusted all-time peak!
Gasoline and heating oil ... copper and silver ... corn and wheat ... plus every commodity under the sun has gone through the roof, all driven higher by the plunging dollar.
Last year, Money and Markets editors Larry Edelson and Sean Brodrick told you this explosion was coming. And now it's here.
But no matter how much we may like to brag about our foresight, the fact is that anyone with some Main Street common sense — and without Wall Street's rose-colored glasses — could have seen it coming.
All you had to do was connect the dots:
Dot #1. The credit crunch was threatening to hurt the U.S. economy. Everyone knew that; it was all over the news.
Dot #2. The threat to the U.S. economy was prompting the Fed to print money and trash the value of the U.S. dollar. That was also obvious; even hopelessly near-sighted Mr. Magoo could not have missed it. Plus ...
Dot #3. The falling value of the dollar would naturally help drive gold, oil and nearly all commodities through the roof. You didn't need 20-20 vision to see that either.
So are you surprised that the dollar is in a free-fall and commodities are exploding higher? You shouldn't be.
Nor should you be surprised if these same forces gather speed and momentum in the weeks ahead.
How do you know? Just connect the dots again ...
Dot #1. The Credit Crunch of 2007 has now turned into the Credit Collapse of 2008.
As I showed you a moment ago, the credit crisis is broader, deeper and hitting with greater speed.
It's not just a future threat to the U.S. economy. It's already shutting down credit markets, erasing tens of thousands of jobs per month, and driving hundreds of thousands out of the labor force entirely.
Dot #2. The Fed isn't just printing more money like it did last year. It has deployed entirely new kinds of money creation machines to flood the economy with dollars in far greater volume than ever before.
Dot #3. Commodities aren't just hopping along. They're flying into the stratosphere.
No, they won't go up in a straight line; they will suffer corrections, and those corrections could be even sharper than last year's. But as our entire Money and Markets team has shown you, the big tend is your friend — and this one could be among the biggest of all.
My recommendations:
1. Sell vulnerable stocks and bonds immediately.
2. Get your money to safety.
3. Your best defense is a prudent offense — buying investments that are designed , from the ground up, to help average investors profit in this unusual environment ...
- Inverse ETFs that go up when weak stock sectors fall ...
- Currency ETFs that let you profit from surging foreign currencies, and now ...
- The brand new and diverse universe of commodity ETFs to ride the superboom in gold, oil, silver, copper and more.
Good luck and God bless!
Martin
P.S. Urgent reminder: Tomorrow is the last day to sign up for Sean's red-hot commodity ETF picks to be issued Wednesday. See his webpage .
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