8.01.2007

Trouble ahead, lady in red

The mortgage thing continues to get uglier. Mortgage lenders blow up left and right. Hedge funds are imploding with increasing frequency. Jim Cramer advises homeowners to default on their mortgages (as I've said they would/should do again and again and again).

Two of the smartest people I know have sold all stocks (ahead of the recent downturn) and are sitting entirely in cash.

Consumer confidence is still strong. The consumer doesn't see the train wreck all around him.

This will hit the consumer. As I've said before, we're in the greatest asset bubble in the history of the world, and the bursting won't be painless.

Why am I still long stocks? Maybe the Fed will turn on the fire hose. Foreign and domestic stocks and gold will be where you want to be then, not in bonds and cash. Alternatively, maybe the Fed does its job, breaks the back of inflation, and we have a nasty recession. Another 10% or 20% downside is possible, but I'll take my chances. And foreign stocks could hold up relatively well even in an ugly US economy, at least in dollar terms.

I could be wrong. It's happened before. For an alternative view of the likely outcome, see Market Ticker.

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