The housing meltdown was a major reason in the plummet of the Dow to levels below 7,000. Increased confidence in the financial system resulted in a 2 month rally.
However, sentiment is changing as people are starting to see another potential meltdown on the horizon.
This next meltdown is likely drop the Dow back to levels below 7,000. In addition, it is possible the country could see non-business bankruptcy filings hit 700,000 in the fourth quarter of this year, which would more than double the number of filings of Q4 2008. In fact, it would set a new record for bankruptcy filings.
The practice of companies willing to extend credit to many consumers, who may not have been in a position to take on that credit, combined with consumers’ willingness to take advantage of that available credit was the main factor in the first collapse.
The next one will have a similar story line.
This time, it is the credit card companies that have over-extended credit to many consumers. And, once again, many consumers have taken advantage of that available credit.
Like the housing crisis, this is not sustainable and will result in huge losses for companies as well as major financial issues for hundreds of thousands of consumers that will result in increased bankruptcies.
Both issues are not good for the equity markets as it hurts consumer spending capabilities and affects company profits. This is why we may, once again, see the market fall past 7,000 and see, for the first time, record bankruptcies possibly reaching 700,000 in Q4.