Recipe for Disaster

The U.S. dollar has sunk to a record low against the Euro and a 26- year low against the British pound.

The subprime problem, which most of Wall Street told us was a problem restricted to small groups of lenders, is now affecting other financial institutions. Countrywide Financial Corporation, the largest U.S. mortgage lender, saw its quarterly profit drop one- third because of difficult housing and mortgage conditions.

With most subprime lenders closing shop, and with interest rates on mortgages about 50 basis points higher than just six months ago, the housing market in the U.S. is coming to a screeching halt.

The stock market continues to move higher but is starting to experience some sharp daily corrections, such as the 226-point tumble the Dow Jones Industrial Average experienced two days ago.

Gold bullion is close to breaking above US$700.00 per ounce. I see this move as imminent, as world central bankers (except for the U.S.) raise interest rates to fight inflation.

>From the current happenings in the financial markets, I see a recipe for disaster developing. Our dollar might just be falling too quickly, which could lead to higher interest rates unexpectedly in the U.S. Higher interest rates, falling housing prices, and billion in U.S. adjustable rate mortgages resetting to higher interest rates is taking its toll on American homeowners.

While I’m likely the only economist out there with this view, I see the likelihood of a homemade recession in the U.S. developing quickly. As I have written before, I would not be surprised to see us in a full-blown recession by the end of 2007 or early 2008. Please, take what steps you believe are necessary to protect your investment portfolio from such a scenario.