Subprime Debt Crisis Causes Corrections in Dow Jones, US Dollar

The stock market came back so strongly on Tuesday that it sent us into depression.

We had it all figured out. Finally, we said just 24 hours ago, ‘the tide has turned.’

We liked the sound of it. A nice Shakespearean ring to it: “There are tides in the affairs of men…” And it has a no-nonsense certainty about it too. Once the tide has turned, there is no point in arguing with it…or even analysing it. The liquidity is going the other direction; that’s all there is to it.

So what happened? The Dow rose 319 points….

Either we are wrong; or 10 million investors have no idea which way the tide is running.

Here at Markets and Money , we are rarely wrong…but often incorrect. Something that ought to happen usually does happen, but not necessarily when we expect it. The dollar ought to go down. Stocks ought to go down. Savings ought to go up. The average house ought to go down. The average householder ought to stop spending so much money. Our latest book ought to win a literary prize. These are things you can count on, dear reader. But don’t hold us to a schedule.

There is, of course, more under Heaven and more on Earth than is contained in our philosophy – but not much! So, if we think stocks ought to go down…they darned well ought to go down…if not sooner, then later.

According to our view of things, the great credit bubble is losing air. We reported an estimate that the subprime crisis might end up costing as much as half a trillion dollars. This week brought more estimates – one at US$200 billion. The other at US$400 billion. Whatever the final tab, a hundred billion here…a hundred billion there. Pretty soon, you’re talking real money. And when this money disappears, you have to expect that people will have less money to throw around.

“The bloodbath in credit and financial markets will continue and sharply worsen,” writes Nouriel Roubini.

Roubini says that banks have only fessed up to their losses through the third quarter of 2007. But remember, the problem with these subprime loans is that the collateral – housing – is losing value. The more value it loses, the worse the crisis gets. We won’t know the scope of losses for 2007 until the annual statements come out in the spring of 2008. And then, losses for 2008 could be even worse.

Meanwhile, a report on cautions investors:

“Don’t expect fallout from the subprime credit crisis to ease anytime soon…”

But, yesterday, Wall Street acted as though it were already over.

Corrections, corrections, corrections…

The slide in stocks is correcting…the aforementioned 319-point rise in the Dow is probably a correction in what will eventually be seen as a bear market. Gold is correcting too. It fell more than US$8 to under US$800. Oil is correcting…down to US$91. Commodities – notably copper – are correcting too.

The only thing that is not correcting, yet, is the dollar. The dollar index fell again yesterday, with the yen up against the greenback. But the euro did not rise against the buck yesterday, so that was at least a bit of a correction.

Corrections, corrections, corrections…or does this mark a new phase? Has the generalised deflation we’ve been warning about arrived already?

Probably not. So far, these are small corrections…mostly overdue. Remember the basics…
…housing is going down because it is not affordable…

…the financial industry is going down because everyone already has more than enough debt….

…stocks are going down because earnings – mostly from finance and debt – have peaked out…

…the dollar is going down because there are too many dollars and not enough real goods and services to buy with them…

…gold is going up because it is the natural, traditional refuge in times of monetary crisis…

So, let’s stick to the formula, at least for now – sell dollar assets on bounces…buy gold on dips. It looks as though an opportunity is coming our way…

The Shanghai stock market is off about 15% from its peak. Another correction? Or has the tide turned in the East as well as the West?

Colleague Porter Stansberry sends this note:

“I think China is going to be the largest economic pile-up ever witnessed by mankind.
“Reason: they have no legal foundation of common law. They have no experience with capitalism. No accounting standards. Mal-investment all over the place. Their castle is based in one part on pieces of paper issued by the most heavily indebted, bloated, derailed government ever conceived and another part on inflation-induced consumption by Americans. Then there’s the demographics idea and a country full of angry young men who can’t [find wives…China lacks women]. They will agitate.
“All the ingredients are in place for a monumental stock bubble followed by a monumental collapse…”

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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Steve Bellis

I have only recently come accross the daily reckoning. It’s excellent. Keep on keeping on.

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