Stocks have now begun to confirm what the credit and bond markets have been telling us for weeks: that we are in a full-scale Crisis and going to new lows.
This process will not happen all at once. Remember, the S&P 500 didn’t hit its low for the first round of the Crisis until almost six months after Lehman Brothers went under.
So the markets are not going to suddenly go to 500 on the S&P 500 in one day. Instead it’s going to be similar action to what we’ve already seen: sharp violent sell-offs followed by snap-back rallies.
However, the fact that leverage levels prior to this round of the Crisis were even higher than those from the Tech Bubble… combined with the $600+ TRILLION in derivatives floating around in the financial system… should give you a sense of how serious the market declines can and will be as this whole thing breaks apart.
Indeed, this is the very problem with leverage: once things go against you, the selling pressure can create a death spiral as the drop in asset prices result in margin calls and redemptions which in turn beget more selling/ drops in asset prices and on and on.
However, this doesn’t mean that things will go straight down. Just as we’ve seen in the last month, there are going to see sharp snap-back rallies during the process of deleveraging and default.
Indeed, during the 2008 Collapse we saw rallies of 11%, 17%, and 20% respectively. Every time the market rolled over hard soon afterwards.
However, the fact remains that we are going down, down, DOWN over the coming months. We're going to be seeing major banks go under, market crashes, food shortages, government shutdowns, and SYSTEMIC FAILURE.
Yes, I believe that before this mess ends, the financial system as a whole will have collapsed. What's coming is going to make 2008 look like a joke.
If you have yet to prepare yourself for what’s coming, now is the time to do so. Whether it’s by moving to cash and bullion, opening some shorts, or simply getting out of the markets altogether, now is the time to be preparing for what’s coming (remember, stocks took six months to bottom after Lehman… and that was when the Fed still had some bullets left to combat the collapse).
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