Are we headed for an epic bear market?

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This is a great article explaining structured finance and the implications for its failure.





It reminds me of the problem with excessive leverage of the stock market runnup in the 1920s when investors were given 10:1 margin which allowed them to bid stock prices up to unsustainable levels. The unwinding of that credit bubble kicked off the Great Depression.





It does make me wonder if the unwinding of this credit bubble created through excessive leverage in the CDO market is going to have the same impact.
 
<p><em>"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."</em></p>

<p>This statement caught my eye.....</p>

<p>Hey, how do I research my pension funds CDO involvement ?</p>
 
I don't believe the stock market will tank at all. I think a larger correction will happen either the end of this year or the first half of next year. Other than that, the market will continue to be a bull market for a while. The foundation of the market is still quite solid, unlike in 2000. EU central bank will lower rates next month for sure, it will happen for certain. If EU don't lower their rates, they won't be able to export much, and EU economy will suffer. China/Japan will buy US dollars to help maintain the exchange rate for the same reason. I don't believe for a second that China will try to tank the US economy, (will you try to screw your No.1/2 customer over?). China/US/Japan/EU are all interlocked together, one of them goes down, all of them will go down together.
 
I think capitol flow out of real estate and into equities will off set some or most of the negative effect on equities from reduced consumer spending. As for the credit market. Capitol will have to be parked somewhere for a return.
 
<p>Irvine Renter - I am worried about that too. Too much borrowing plus quotes like the one from Greenspan below (which imply that all the post-Great Depression banking stuff put in there to prevent it from happening again isn't working in our brave new financial world), makes me worry about a Great Depression scenario as well.</p>

<p>http://news.yahoo.com/s/nm/20070921/bs_nm/greenspan_bubble_dc_1;_ylt=AkQ83cA97nN3Scmw4pms4KcE1vAI </p>

<p>“There is no doubt about the fact that low interest rates for long-term government bonds have caused the real estate bubble in the United States,” he said.</p>

<p>“The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure,” he said.</p>

<p>“Nobody could do anything about it, neither us nor the European Central Bank. We were powerless,” he said.</p>
 
I wish I could have tourbillon's confidence about the future of interest rates abroad. Calculated Risk also believes the other central banks will be forced to follow our lead. I am not so sure. They have their own problems.





The other thing that concerns me is when I read the comments of people who place such faith in our economic systems to weather any storm. When the general public has that much faith in the system, there is a moral hazard created which makes the system's collapse more likely. When you read comments like those above from Greenspan where the FED admits they were powerless, it makes me even more concerned that the meltdown scenario might come to pass.





If we have truly built our prosperity on leverage based on artificially inflated asset values, it could easily lead to a cascade of margin calls as lenders call their loans which requires the disposition of assets which drives values down and prompts more lenders to call in their loans. The downward spiral of deflation and debt contraction is what caused the Great Depression. If the FED admits they are powerless to stop this once it gets set in motion, I can see why they jumped all over the rate cut in an attempt to stop the first domino from falling.
 
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