The Dow Industrials Average hit a two-month low today, and stocks seem to be moving into position to tumble further. The Fed's rate cuts have done little to bring the economy out of its current slump. The only sector that has held up is housing, and we expect it to follow the rest of the economy soon.
And matters are only going to get worse. Americans are drowning in debt. Just last week, the Federal Reserve announced that the outstanding balance on credit cards, auto loans, and other consumer loans rose to $1.58 trillion -- an all-time high! Mortgage debt is a whopping $5.2 trillion.
Soon, consumers' inability to pay their bills will force them to stop spending. And delinquencies are already on the rise. Credit card delinquencies are near 5% of outstanding balances. Mortgage delinquencies rose to 4.5% of outstanding loans -- the highest since third quarter of 1992. And bankruptcy filings are on a record pace.
The national savings rate is negative which means the average person owes more than he has in savings. As more Americans lose their jobs, this small debt problem will turn into a crisis, affecting every aspect of the economy, including the stock market. Smart investors should prepare now.
When the debt crisis boils over, today's drop in the Dow will seem like a pothole compared to the crater-sized sink hole that's coming.
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