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U.S. Financial Crisis: NOT A "Shock" To Our System
The phrase “Dog Days of Summer” just got literal. A Wednesday, August 27 L.A. Times article explains why consumer confidence is sinking to a 40-year low, via a science experiment involving -- well -- two obedient canines. Here’s the gist:
Control dog: In room “A.” Bell rings. Mild electric shock follows. Has a switch to turn off voltage and quickly learns to use it. Result: Fido stays ahead of shocks and remains “relatively” happy, albeit anxious.
“Yoke” Dog: In room “B.” NO bell. NO switch. When control dog is shocked, so is he. No ability to anticipate or control the jolts. Result: Fido succumbs to a state of “‘learned helplessness,’ a psychological condition caused by prolonged exposure to unpredictable events.”
According to the article, Americans have become like the “yoke dog,” whimpering feebly in the corner of its cage. “We have been exposed to an alarming sequence of market disasters,” barks the author. “All of these came to us in quick succession and in direct contradiction to the prevalent advice given by financial advisors and the media.”
It’s true. As the over-charged current of leverage and liquidity began to surge through the U.S. economy, the mainstream experts sounded no warning “bells” of the coming shock. (See archive of past media commentary below):
- March 2005 CBS News: There is “a new paradigm in housing in which prices will continue to rise indefinitely.”
- July 2006: Citigroup Inc CEO Chuck Prince assures, “As long as the music [in terms of liquidity] is playing, you’ve got to get up and dance. We’re still dancing.”
- April 20, 2007: Treasury Secretary Paulson announces, “All signs I look at [show] the US housing market is at or near a bottom.”
- July 13, 2007 London Conference of the world’s top financial leaders: “The subprime implosion is a contained, isolated, and temporary event with little risk of wider fallout.”
The LA Times piece is forgetting one thing though: Just because the “yoke” dogs didn’t hear the bells, doesn’t mean they weren’t being set off by an entirely different source all together -- Elliott Wave International.
The earliest warning signs came from Elliott Wave International founder Bob Prechter in his 2002 book “Conquer The Crash,” the pages of which include these excerpts:
“What screams ‘bubble,’ giant historic bubble, in real estate is the system-wide extension of massive amounts of credit to finance property purchases… When prices begin to fall, lenders will experience a rising number of defaults on the mortgages they hold.”
And -- Five major conditions now “pose a danger” to many banks. Among them: “Low liquidity levels, dangerous exposure to leveraged derivatives, the inflated value of the property that borrowers have put up as collateral on loans, and the substantial size of the mortgages that their clients hold compared both to those property values and to the clients potential inability to pay under adverse circumstances.”
When the point of no return had been reached, EWI’s monthly publications kept readers one step ahead of the major sea changes via the following insights:
- March 2005 Elliott Wave Financial Forecast: “The Real Estate Bust Begins “The potential for a serious unraveling of the housing market is confirmed. As the most aggressive dispensers of credit to the housing industry, subprime firms are on the front edge of the bubble.”
- July 2005 Elliott Wave Financial Forecast: “There’s no mistaking it. Now is the most dangerous time to get on board the housing bandwagon.”
- September 2005 Elliott Wave Financial Forecast: “Banks seem to be blind to the danger of overpriced collateral as they continue to stuff their balance sheets with mortgage-backed assets… Lenders are still behind the curve, but once they see the writing on the wall, the rug will get pulled out from under the economy in a hurry.”
Don’t be “shocked” into a state of “learned helplessness.” Anticipate the coming changes in store for the U.S. economy via a risk-free subscription to the complete Financial Forecast Service. Click here to get started.