Market Meltdown

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Back on June 10, 2006, I advised 401K investors to get out of the Stock Market. My opinion was based on an article, which rang so true, by Jon Markman about a looming housing meltdown. I was right, because he was right. The meltdown is happening.

Curbs are in on the stock exchanges limiting how many stocks can be sold. Reason: to prevent the stock market bottom from falling out and allow panic to dissipate. The Dow is down over 240 points today, over 650 points in recent weeks. In June when I wrote the article referenced above, the Dow was at 10,892. As of now it is at 12,075. 401K investors are still ahead of the game from June of last year, but, not by a lot. And the ripple effects are not over.

The naysayers against gloom were saying the last couple days that the correction is over after a 5% retrenchment. The realists were saying 5% is only half way there by historical references. Another 5% correction, added to management fees, will mean 401K investors who made no changes in their diversity of holdings, will have gained nothing in the stock market since June of 2006, the end of the last market correction.

Why is this happening? As I wrote in June, the answer is simple: DEBT !

The sub-prime lending industry, lenders who lend to folks of higher repayment risk, went a little crazy and overboard on greed. One is now facing bankruptcy, and others are in for a rough ride. The CEO of CountryWide reported on MSNBC today that the ripple effects of this are just beginning. He is right and he should know, he is an investment banker and his company is holding about 5% of that new high risk debt.

When the prices of new homes began falling last summer, the fix was in. Millions of Americans had seen there asset value (also their equity value) in their homes rise significantly during previous years. One would think this is a good thing. And it was for awhile, for those who did not take out loans against that equity in their homes. But, for the millions who did, the equity value of their homes has been plummeting as there are far more homes than good-risk qualified buyers these days. (More greed in the construction industry). That means those folks who borrowed against their home's elevated value, have become high risk borrowers, because the new falling equity value in their home no longer equals the amount they borrowed and owe.

In other words, lenders loaned money against a collateral value on homes which no longer have that collateral value. Foreclosures are climbing. Folks have been spending their refinance loan money on things and lifestyles that have no collateral value. With wages failing to keep pace with inflation in energy, medical insurance and care, and education costs, all a higher priority than a mortgage, 100's of thousands of Americans are choosing to default on their home payments instead of education, health care, and energy to get to and from work.

The squeeze is on. The economy is about to show larger drops in GDP growth fueled by the loss of home construction and associated jobs. The high risk lenders are seeing their interest and insurance rates go up, at a time when foreclosures, defaults, and bankruptcies are also going up.

Former Fed Chairman Alan Greenspan remarked a couple weeks ago that a Recession is now a 33% probability due to this anticipated slowing of economic growth. The new Fed Chairman, Ben Bernanke, recently said the long term picture is bleak if Congress and the public don't act "10 years ago" to make the future affordable for the American middle class. Overseas markets continue to do as well, and in many cases better than U.S. stock markets overall, which is attracting money overseas instead of here. With this trend will come higher interest rates to float American debt, Bernanke says.

Personal Debt for Americans is record breaking. The national debt continues to set new records now approaching 9 trillion dollars, and the trade deficit is set to hit another mind boggling deficit of 3/4 of a trillion dollars this year alone. America is experiencing a negative savings rate, which means we are spending more than we are taking in. In a nutshell, America is drowning in debt, and collector's are beginning to demand payback or, higher interest on the higher risk loans.

Debt Graph

For millions of Americans, that spells default personally, and for the nation, as safety net spending approaches deficits in just a few years, it spells something far, far worse. It spells rising interest rates, loss of jobs, loss of consumer dollars in the marketplace, and rising costs for basic necessities.

This is not a "sky is falling" scenario. In an instant, if a comet hits the earth, everything is over. That is not what is happening here. What is happening here in America is a death by a million paper cuts, over years, weakening the nation's immune system to fight off cyclical dips in the economy and demands by foreign creditors for either payback or higher interest rates for money loaned to float our debt. There will be rebounds, and many investors will make money on those. But, overtime, there will be increasingly more dips than rebounds, and the dips will get deeper while the rebounds fail to rise as high as before. And smart investors will invest overseas instead of here, a trend already underway.

Unlike a comet, we can avert this economic calamity of our own making. But we can only avert this calamity by voting out incumbents in 2008. Incumbent politicians become beholding for reelection money and support by corporate lobbyists and special interests who seek government for their benefit, not the nation's or the people's benefit. We must vote out incumbents who insist on spending a trillion dollars defending the borders and Constitution of Iraq instead of American borders and Constitution. We must vote out incumbents who talk responsibility but spend and tax our dollars irresponsibly.

Haliburton, seeing the writing on the wall and accepting that government handouts for its services by the Bush Administration and Republican Congress are over, has announced it is moving its corporation to Dubai in the Middle East. They got the American billions of tax payer's dollars, and now they are running to the Middle East since Democrats are going to being scrutinizing their dealings with the Bush Administration. China will be wanting Haliburton's services in the future, and that would conflict with American interests. So, they are going to become an Arab corporation where America can't interfere and chastise them for not being patriotic. They will take profits from the Chinese government instead which doesn't have problems with ethics, loyalty, or taxpayer concerns in no-bid contracts with Haliburton .

Haliburton is not, and will not, be alone in its abandonment of America which made it prosperous in the first place. Corporations have one allegiance, profit. They will go wherever profit can be optimized. This is very different from mom and pop businesses whose families and lives are integrally inseparable from their nation, their state, and their neighborhood. In this regard, "free enterprise" has a very different meaning for small business than for large corporations.

Small businesses both feel and need their integrity as Americans, as neighbors, and patriots in order to conduct business. They recycle their revenues and profits back through the American economy. Corporations, whose actions are dictated by bean counters and attorney's working on behalf of shareholder and executive management profitability goals have no such obligations to country or flag. Corporations are not, and by design in a global economy they helped foster, will not, serve any nation at a cost to profitability. It wasn't always this way. But, it surely is today.

I hope that our Politicians will grapple with, and finally accept this fundamental truth about business and free enterprise. If the nation's future rests on the decisions which corporations make for it, our nation is lost. If on the other hand, our nation's future rests with the citizens of this country and its small businesses, our nation's future will not be sold out for short term profitability. America was never designed for the end of profit. It was designed for the ends of dignity and protection of freedom loving people wanting to work to make a good life for themselves and their children's future.

Americans. Our future rests with our government attending our, and the nation's long term survivability, not that of corporations. If we don't give our vote for the future health of our nation, our children won't have a future they can enjoy as we did. We must begin to vote for politicians who recognize that refusing corporate money and lobbying is an investment in America's future, not the other way around, as so many Republicans and Democrats would have us believe.

We must vote for politicians who will demand reinvestment in America by corporations or, let them leave, to be replaced by smaller business leaders who know their future is pinned to the nation's future, and refuse to be bought by foreign investors and foreign profit strategies.

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America is but one Katrina, one serious terrorist attack, one large earthquake, one more war away from an economic depression that will send tens of millions of Americans into the streets homeless, jobless, and waiting in line at charitable organizatio... Read More


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This page contains a single entry by David R. Remer published on March 13, 2007 4:51 PM.

Freedom, Jessica Lunsford, and America was the previous entry in this blog.

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