Martin D. Weiss, Ph. D. examines the U.S. economy and all the shocking events that are leading to a recession in the near future. In this issue of Money and Markets, Dr. Weiss takes explains what investors can expect during a recession.
Jupiter, Fla. (PRWEB) January 30, 2008 -- Martin D. Weiss, Ph. D. examines the U.S. economy and all the shocking events that are leading to a recession in the near future. Dr. Weiss takes explains what investors can expect during a recession.
It's distressing to say that America's day of financial reckoning is not just coming. In some ways, it has already come and gone. The breakdown of the greatest asset bubble of all time, the housing boom, began over two years ago. The fires of the subprime mortgage crisis, which quickly enveloped much of the $14 trillion U.S. mortgage market, began over one year ago. And the credit crunch, strangling new financing to millions of debt-addicted consumers and corporations, began over six months ago.
Today, U.S. home builders are already mired in their greatest depression since the 1930s. Major money-center banks have already suffered some of their largest losses in modern times. Consumers have already snapped shut their pocketbooks. Investors are already stampeding to safety. Therefore, it may already be too late to prevent economic decline, too late to stop financial turmoil, and too late to break the vicious cycle now emerging between them.
And in every major recession since World War II, financial stresses of this magnitude appeared only after the economic contraction was in its final stages. That's when corporations finally threw in the towel and filed for bankruptcy. That's when consumers did the same. This time is very different. This time, defaults are surging even before the onset of a recession and before millions of Americans lose their jobs or see their net worth sink.
So this begs an urgent question: If the U.S. has already seen blatant and abundant signs of financial stress or distress, what can investors expect in the recession?
In its recent front-page analysis, "Worries That the Good Times Were Mostly a Mirage," The New York Times explained it this way:
"Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn't go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.
"Now, some worry, comes the payback.
"Martin Feldstein, the éminence grise of Republican economists, says he is concerned that the economy 'could slip into a recession and that the recession could be a long, deep, severe one.'
"First, Wall Street hasn't yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Economy.com.
"'Part of the big uncertainty'," Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, 'is where the bodies are buried.'
"The second problem is that real estate and stocks remain fairly expensive. This shows just how big the bubbles were: Despite the recent declines, stock prices and home values have still not returned to historical norms.
"The price declines will also lead directly to the third big economic problem. Consumer spending kept on rising for the last 16 years largely because families tapped into their newfound wealth, often taking out loans to supplement their income. This increase in debt, as a recent study co-written by the vice chairman of the Fed dryly put it, 'is not likely to be repeated.' So just as rising asset values cushioned the last two downturns, falling values could aggravate the next one."
By the third quarter of last year, just the derivatives held by U.S. banks alone ballooned to $172.2 trillion in notional value, according to the latest report of the U.S. Comptroller of the Currency. Also by the third quarter, credit default swaps surged to nearly $14 trillion. If most of these derivatives were traded on regulated exchanges, they might not be quite as alarming. But the reality is that 95% of the derivatives are traded over the counter. In other words, they're off-the-radar, one-on-one contracts between two trading partners and no one else.
Pivotal players in the credit default market are the big U.S. bond insurers such as Ambac and MBIA. When issuers default, these insurers are supposed to provide a tamper-proof safety net. If these bond insurers were not at risk of losing their triple-A ratings, it might not be of such urgent concern.
"But the fact is, Ambac has already lost its triple-A rating from Fitch. A key point: The main reason so many big players have been willing to take so much risk with potentially shaky trading partners in the past five years was because they figured they had their backside covered. They had credit default swaps. They had bond insurance," Dr. Weiss states.
To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?Government-Rescue-Too-Late
About MARTIN D. WEISS & MONEY AND MARKETS
Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.
Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.
Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.
Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.
Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.
Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.
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