The Phaserl


This Is Another “Subprime” Waiting to Blow

from Wolf Street:

Dow down 239 points yesterday – or 1.5% – after Japan posted its biggest one-day gain in seven years. This is getting interesting again. If it is just “volatility,” as Wall Street’s shills in the press maintain, it will probably pass soon. Everything will be okay. Back to routine imbecility before the end of the month.

But if these whipsaw movements are heralding a bear market, U.S. stock prices could be cut in half… or more. And they may not recover for 10 to 20 years. (Catch up on the details of our bear market forecast here.)

Which is it? Bull or Bear? No one knows, of course. But it looks to us as though the whole shebang is getting ready to collapse. So far, the correction has trimmed $12.5 trillion off the value of global stock markets. There are a few reasons for stocks to go back up… and many reasons why they might want to go down further.

The 2008 global financial crisis was centered on mortgage debt. There was too much of it that couldn’t be repaid. When the value of the collateral – homes – headed down, the bubble popped.

Today, consumers have about the same amount of debt. But now the excesses are in auto loans and student debt. As you can see below, total auto loans stood at about $781 billion in 2007. Today, they’ve topped $1 trillion. And student loans have more than doubled over that time to $1.3 trillion.

Again, the collateral is falling in value. Used-car prices fall, as leases expire and more used cars hit the market. As for student debt, the “collateral” is the earning power of the person who borrowed the money.

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