Crash risk in Summer/Fall 08

Financial Sense by Christopher Laird, PrudentSquirrel.com | June 19, 2008
First of all, let’s list some of these dangers and danger periods that we foresee coming.

• The US and Israel are getting ready to do something about the newly militant Iran. The nuclear debate is only one dimension of that issue. Another is the threat that Iran is becoming too big a bully to the other more moderate Mid East nations, and not just Israel.

• There is a very large unease again building in the world financial markets. Not only is the credit crisis not really improving (new estimates out now that financial institutions are looking at $1.3 trillion of losses) but world financial markets are actually way down over the last year. Many Asian markets and also many US stocks are down 30% and more. A building unease is accumulating that can only lead to another real big world financial sell off, lasting probably up to a month, before any settling comes in after a month long bout of central bank firefighting efforts.

• Rising inflation is unsettling financial markets, as it is unsettling the US and EU central banks. A serious friction has developed that the ECB is not coordinating efforts with the US Fed, as the ECB fights inflation, and the Fed focuses on preventing a total world financial meltdown. So far, these efforts are rather contrary to each other. The dissention is unsettling financial markets.

• Intolerably high energy and food prices. Disastrous floods in the US Mid West grain belts are going to lead to a world food crisis in 09. We have only seen hints of this in 08. World inflation will be seriously increased in the entire world as a result. The Chinese are particularly vulnerable to this issue.

There are more dimensions to this but well stop there....

Overall, we believe that this Summer will lead to moderate market turmoil, followed by severe market turmoil in the Fall and Winter 08 as market sentiments deteriorate. It does not help that the Royal Bank of Scotland just issued a world market crash alert this week. Nor does it help that Morgan just put out a report that there is a big risk of a financial ‘catastrophic event’ due to the ECB fighting the Fed regarding interest rates and monetary policy…

“We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts…” –Morgan