(The first part of this report is based on email received from economics analyst Monty Agarwal via firstname.lastname@example.org)
If history teaches us anything, it's that when even ONE major government defaults on its debts, economic chaos follows. The crisis unfolds in four quick steps:
FIRST, since a sovereign debt default would inevitably cause ALL bonds to crash, investors stampede for the bond market exits, dumping as much as they can as fast as they can.
SECOND, as the bond market reels, interest rates skyrocket and credit tightens. The rates on 30-year fixed-rate mortgages, auto loans and other long-term debts soar. Rates tied to short-term money markets -- on credit cards and variable mortgages -- follow.
THIRD, consumers -- whose spending represents fully 70% of the economy -- snap their pocketbooks shut.
FOURTH, corporate earnings and stock prices crater. As the economy hits the skids, unemployment soars.
Clearly, these events would be the coup de grÃ ce to an economic recovery as fragile as this one is. And they would almost surely transform a Great Recession into a Great DOUBLE-DIP Recession, if not worse, plunging us into the second bear market in three years, lighting the fuse on a second explosion in unemployment, and triggering a second surge in personal and corporate bankruptcies.
Indeed, this disturbing scenario is already beginning to unfold before our very eyes -- not just in ONE major Western country, but in TEN of them!
We've known for some time that Italy and Ireland are at risk for default -- and just this week, we saw how investors' fears have caused them to begin dumping British pounds and gilts (bonds) like there's no tomorrow.
Plus, the soaring cost of Credit Default Swaps -- "insurance policies" that protect investors against default -- on the debt of Greece, Portugal, Romania, Lithuania, Latvia, Iceland and the Ukraine is a clear sign that investors believe they are also at elevated risk of default.
Put simply, it would only take ONE sovereign debt default to crush this anemic recovery, but no fewer than TEN major Western countries are now at risk!
What's more, no fewer than THREE powerful forecasting tools are confirming that a great bond market conflagration, stock market decline and double-dip recession are now on the horizon:
CYCLICAL ANALYSIS CONFIRMS IT
The cycles identified by the Foundation for the Study of Cycles have accurately anticipated nearly every major shift in market direction, in every major asset class, in advance ... for 39 years.
And now, as the Foundation's Research Director, Richard Mogey and I demonstrated in Nine Shocking New Forecasts for 2010-2012, the current cyclical analysis is confirming that a major new decline in the economy is coming later this year.
- U.S. stocks will decline starting this year and continue falling in a zigzag pattern through 2012.
- The U.S. dollar index may continue to firm somewhat as the European debt crisis drives investors into dollar-denominated investments. But then the greenback will collapse until late 2011 as the U.S. sovereign debt crisis runs its course.
- Serving in its capacity as a global crisis hedge, gold will skyrocket FAR higher than $2,000 per ounce by the end of 2011.
- Crippled by soaring interest rates due to the U.S. debt crisis, our economy will suffer a devastating double-dip recession in 2011.
POLITICAL ANALYSIS CONFIRMS IT