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Market plunge a symptom of trouble
Experts had expressed concern over global credit bubble


The Dow Jones Industrial Average fell 311.5 points today to close at 13,473.57 in a broad market sell-off that at the market low for the day saw the DJIA down over 400 points.

It was the second major market plunge this week. On Tuesday the Dow Jones fell 226.47 points, closing at 13,716.95, even though the average closed just a week ago for the first time ever over 14,000, at 14,000.41, after a gain of 82.19 points.

Market Plunge Predicted

WND previously has reported the stock market bubble could burst, especially if the collapse in the sub-prime mortgage market spilled over into the stock market.

And WND reported on a Jan. 31 letter written by the Carlyle Group's founding partner and managing director, William E. Conway, Jr., to the firm's investment professionals worldwide.

Conway warned the firm's investors to anticipate that the continued rise of world stock markets due to a glut of liquidity in the world financial system would not last forever. When the liquidity bubble finally burst, Conway expressed concern that the resulting U.S. recession could become a major worldwide recession.

Debt Bubble Bursts

Robert Chapman, the author of the International Forecaster, an economic newsletter with an international audience estimated to number over 100,000 readers, warned in his newsletter on July 25, that, "We face a collapse in real estate and then in the stock market, which are parts of a larger banking crisis."

For months, Chapman has been cautioning that the dot.com bubble burst, followed by a burst in the real estate bubble, and that now the global debt bubble is an issue.

For over a year, Chapman has predicted a collapse in the heavily leveraged $1.4 trillion dollar unregulated hedge fund market and in the little-understood derivative market where leveraged exposure may be as high as $500 trillion.

WND has reported the decision of the Federal Reserve to quit publishing a traditional index, "M3," that has been a broad measure of the money supply, signaled a decision by the Fed to pump the economy with excess liquidity.

Since the Fed quit publishing M3 data, economists who have attempted to re-create the index from other available data have estimated that M3 data would today be reporting upwards of a 10 percent increase in the money supply, a level that would be considered high by historical standards.

"Liquidity" is defined by economists as money available in all forms to be given out as debt, ranging from credit card debt, to mortgage debt, to large quantities of institutional debt that is typically used in complex financial transactions such as highly leveraged corporate acquisitions.

Excess liquidity, as reflected in the rise of highly leveraged hedge fund accounts, has been widely attributed to be a major factor in the rise of the stock market in the recovery since 9/11.

Chapman now estimates that credit markets are in the grips of a "borrowing mania assisted by the Federal Reserve. U.S. leveraged buyouts have pushed the sales of high-risk, high-yield debt paper up 70 percent to $1 trillion during the first half of this year."

Dollar Hits Historic Lows

In the last two weeks, the dollar has hit a series of historic lows against the euro. On Monday the euro rose as high as $1.3851, an all-time high.

Meanwhile the dollar has been closing at or near 80 on the U.S. Dollar Index, dangerously close to dropping below this technical support point, possibly on the way to a new, lower support point in the 70s.

Chapman estimates that "the U.S. Treasury and the Fed will make a last ditch attempt to defend the dollar between 70 and 80 on the U.S. Dollar Index." From there, Chapman sees the dollar as falling as low as 72 to 75, with the very real possibility that a low of 55 on the U.S. Dollar Index could be "a reasonable correction."

Impact Hits Home

When the credit bubble fully bursts, values in the home market may be further depressed, driving down even more the value of homes across the United States.

Chapman's conclusion for the average American is not optimistic.

"This means you may not be able to get a home equity loan now," he wrote in his July 25 newsletter, "or that your retirement savings will grow more slowly or not at all."

Chapman advised his subscribers that gold was one of the few secure asset classes he was recommending for investors.

Further Downturn Predicted

As WND has previously reported, John Williams, an econometrician who publishes the website Shadow Government Statistics has been predicting an economic downturn.

"The dollar could lose as much as 30 percent of its value in 2007," Williams told WND in January. "In 2007, we are likely to see the economic downturn of 2006 develop into a structural recession and yet we have international trade and federal budged deficits careening out of control."

"Against the backdrop of intensifying inflationary recession, the dollar has started taking some early and heavy blows," Williams writes in his current subscriber newsletter. "The sub-prime mortgage difficulties have gained media prominence, but they are just the beginning of difficulties for mortgage and other asset-backed securities."

Williams sums up his concerns about the likely bursting of the liquidity bubble as, "Debt upon debt, leverage upon leverage – the sub-prime real estate loan problems are symptoms of bigger issues."

Williams estimates that the mountain of collateralized debt created by Wall Street – including mortgage-backed securities, asset-backed securities, collateralized debt obligations, or related derivatives – are a small part of a much broader derivatives market that may now amount to $415 trillion according to the Bank for International Settlements.

These complicated and difficult to understand debt investment instruments are likely to devalue or even default in a global market liquidity contraction that we may now be beginning, as witnessed in this week's DJIA market collapse.