“Surrounded by Warning Signs!”

Could the stock market still feel the pain of a double dip?

The market had a huge scare last week which left Wall Street reeling!

Traders, analysts, and everyone on Wall Street are worried that this might not just be a glitch. They’re calling it a “flash crash” but it could be one of the many warning signs that the market is just two converging economic crises from a meteoric fall to a new bottom?

The new bottom—a more realistic bottom given all the band aids that have been applied to this economy—could be the second leg of the double dip. There is compelling evidence, largely ignored, that the March low of 6,547 could be tested again.

Despite the rising markets there has been a pall over the trading floors for sometime. And rightly so. The signs are there and they are many.

But does that indicate a double dip?

Last Thursday, David Hefty, CEO of Cornerstone Wealth Management appeared on Squawk On the Street and identified several of the huge warning signs that threaten the global markets.

David pointed to several major issues that hang over the global economy and impede the potential for ‘real’ recovery without even including what’s happening in Europe. He cites the housing market and increasing foreclosures and China’s housing bubble while trying to slow the country’s rising inflation.

But there are many other problems both domestic and global that should be carefully watched. Some of those were cited in the article in April of 2009, “The Dow at 6,000!” and I still believe the Dow is headed below 6,000!

In the United States alone there are at least 15 economic issues confronting us that could potentially derail any recovery, which includes the health of the stock markets. Comprised of elements that are interconnected, they could fall like dominoes. This instability is entirely related to the world’s decade of uncontrolled and unsustainable over-leveraging.

These issues include: Greece and Southern Europe, the housing market, unemployment, commercial real estate, China, the stimulus, the dollar/Euro currency relationship, the actions of the Fed, sovereign deficits, derivatives, stability of the banks, the health of the consumer, solvency of the states, and the trade deficit.

The world has lost the importance of economic balance. The failure to recognize and address this imbalance has been clouded by greed, arrogance, and piety. This failure will be the cause of the impending global meltdown.

There can be no ‘real’ recovery without stabilization in the housing market and employment. The two are closely connected and a deterioration in one will cause damage in the other. There is no clear indication which way either is heading.

There are potentially more than a million more homes in the current foreclosure process. If true, and these homes do enter the market, there will be another decline in home prices. Housing in February through April seemed to have stabilized and sales were up. But that appears to have been only a function of the home buyer’s credit. This morning the Mortgage Banker’s Association reported a decline in mortgage applications of 27.1% after falling by 9.5% in the previous week.

Unemployment returned to 9.9% in the monthly survey and many people being reemployed are taking positions with much less pay. The employment picture could lead to even more defaults and another leg down.

Both of these elements are connected to, and part of, the state of the consumer.

Analysts are quick to point out that the consumer has returned to their old spending habits. That is seen as a positive since the consumer is 70% of the U.S. economy. A healthy recovery is predicated on the consumer’s confidence and willingness to spend. Without the consumer any recovery would be at best slow and painful.

But a deeper look at the consumer reveals the importance of the stock market, housing, and the stimulus. Retail sales figures are skewed to the higher end of the income spectrum due in part to the rising stock markets. Mark Zandi, of moodys.com, pointed out several weeks ago that a high percentage of people have foregone their house payment and are spending that money on other things. In addition, we’ve seen an increase in spending thanks to the infusion of government stimulus.

As the stimulus is withdrawn—housing credits, unemployment extensions, appliance credits, untenably low taxes—the economy will decline. Private capital is incapable of meeting or sustaining our current needs without government help.

But the piggy-back stimuli’s add to the deficit and, despite being necessary to keep the economy going, will eventually have to be repaid to our creditors.

And the biggest of these creditors is China, which is now experiencing its own potential economic crises—a housing bubble and rapidly rising inflation. With their own economic problems China will no longer be able to finance the U.S.’s rising debt. Our debt shows no sign of slowing.

A look at April’s Treasury Budget, typically a positive month for receipts, destroys any confidence that the deficit is improving. A negative $82.7 billion in April does not bode well for an expectant recovery. Receipts from businesses, only 5% of the overall receipts, were up 8.9%. But the all important individual tax receipts were down 11.6% and show erosion from March. Despite the improvement in business profit, a weakened consumer will put further pressure on the already stressed commercial real estate.

Empty buildings are not good for commercial real estate as hundreds of billions of dollars in commercial loans are due to reset over the next few years. Rents are also declining in an effort to fill these empty spaces. A faltering consumer could further hurt landlord’s ability to borrow on their declining properties. The big picture around many communities is one of empty stores and idle or suspended commercial projects.

Suspended construction projects fall back on the banks and these toxic properties sit on the bank’s books taking away valuable monies that could be lent to other businesses to stimulate the economy and community. Big Banks are not lending, deciding instead to protect their capital positions in case their risky business model fails. At the same time regional and community banks are failing at a phenomenal rate—72 lost already this year—threatening to become a burden to the taxpayers sooner than anyone anticipated.

The sovereign failure of Greece and pending failures of other Southern European countries present another problem and is having a profound affect on the Euro/Dollar relationship. The Euro is weakening and the dollar is strengthening. That relationship will have an adverse affect on the import/export balance and the profits of multi-national corporations. Assuming more debt to pay existing debt is never a good thing and rarely corrects the problem. The trillion dollars gathered to prevent default may only push the inevitable further down the road.

A more truthful look at the decision to provide a trillion dollar infusion indicates it was a move to prevent the collapse of the Big European Banks that hold huge positions in the solvency of the Southern European countries. The Greek package mirrors the move of the U.S. Treasury when it asked for TARP which was used to save the big U.S. banks.

Add the actions of The Fed: their assumption of our Big Bank’s toxic assets to make them appear solvent and the 0% interest rates allowing the banks to cheat the American people; the growing U.S. trade deficit; include the potential insolvency of many of the 50 states; falling stock markets around the world, and the vision of falling dominoes becomes vividly clear.

But there is one thing no one enjoys talking about—the one thing that could bring down the global economy by itself—is derivatives.

Lobbyists are doing everything possible to defeat or sterilize the Lincoln derivatives amendment which will bring transparency to the derivatives market.

Even the slightest exposure into the shadowy world of these instruments could cause the dominoes to crash: countries would fail, hedge funds would default, banks would collapse, currencies would falter and the Dow, as well as other markets, would hit new lows.

The fall to a new low should not come as a surprise to any clear-thinking reasonable person. But it will surprise far too many. There is a tremendous myopia in the market and Congress. So many refuse to see.

We are surrounded by Warning Signs !

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