Economies extend excess credit until a bubble occurs. The results: excess leverage and after an extended period of time, de-leveraging and credit contraction start. This is where we are today.
Now, after a large down move in 2007-2008 in stocks and the economy, we had a very sharp counter trend bounce that is ending. The next phase down is just starting and should be much longer in duration and more severe in price.
The global stock markets have major risk as we enter the second half of 2010 through 2012.
1. Where stocks bottomed in March 2009, now in March-April 2010, you see the opposite–the mirror image.
2. Three things caused the 2009 rebound: a) the government stimulus, b) a weak U.S. dollar, and c) massive cost cutting. All of these have ended.
3. Government intervention into all areas of our economy will continue to restrict economic growth.
4. The U.S. dollar will continue higher most of this year and cause negative effects for most commodities.
5. Risk aversion by investors will result in a move to cash and cash equivalents.
6. Government debt defaults–as in the Greece default–will be a greater problem than the sub prime problem of 2007 and 2008.
7. Watch the Dow Jones– a close under 9800 will be a major warning.
8. Deflation risk is very high as credit availability is limited and higher taxes return.
9. Emerging markets have extreme risk. The Chinese economy is likely to contract under current government restrictions.
