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Are We In Denial About The US Economy & Stock Market?

Are We In Denial About The US Economy & Stock Market?

April 9, 2008

SAN DIEGO ( - George Soros, one of the most successful investors and speculators ever to walk Wall Street feels that the world economy is at the end of a super-boom in asset prices and debt that has lasted since the end of the World War II. 

Soros said this past week that at the heart of the financial crisis was the culmination of a 60-year-old boom in leverage, the result of which will be a far deeper downturn than many expect.


On the other hand, there has been much talk about a recovery of the Financial Sector.


The Financial Select Sector SPDRs (Ticker: XLF), the iShares Dow Jones US Financial Sector (Ticker: IYF) and the Vanguard Financials ETF (Ticker: VFH) all recorded a series of lower highs and lower lows with a current bottom reached at $23.45 on March 17th for the Financial Select Sector SPDRs.


It's true that Financials have recovered somewhat but is there enough fuel (good news) to stage a sustainable rally?


Soros, who was one of the first to forecast a collapse of the US Dollar, feels that there might be a “dead-cat-bounce” followed by a continuation of the downtrend, in both the US Dollar and the US Stock Market, sometime in Q3 or Q4 of 2008.


Goldman Sachs forecasts that global credit losses stemming from the current market turmoil will reach $1.2 trillion (with Wall Street currently accounting for just 40% of the losses).


So far, U.S. leveraged institutions have written off less than half of the losses associated with the bursting of the credit bubble leaving plenty of room for more bad news to come.


Washington Mutual (Ticker: WM) was able to raise $7 billion in new capital from an investment group led by private equity firm TPG, despite posting a wider-than-expected loss for the quarter. As Washington Mutual looks to improve financial health, the bank said it will no longer purchase mortgages from brokers and close all its freestanding home loan offices, resulting in the loss of 3,000 jobs.


Merrill Lynch (Ticker: MER) in January said it would take $6.6 billion from three foreign investment funds. Morgan Stanley (Ticker: MS) sold a portion of itself to China Investment Corp. Citigroup (Ticker: C) took $7.5 billion from the Abu Dhabi Investment Authority in exchange for up to 4.9% of its equity.


An analyst said about Washington Mutual: “I think the $7 billion is enough to get them all the way through, but I suspect the company is going to be smaller a year from now, maybe dramatically smaller.”


You don't have to agree with everything George Soros says about the U.S. Economy or investing. But as he was in the past, he might be right this time again.


Soros has a reputation to withdraw while still ahead of the game. Perhaps his words should serve as a reminder to enjoy an upcoming rally with caution.

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