By Elliott Wave International
Editor’s note: The following article was republished here with permission from the co-editors of the September issue of The Elliott Wave Financial Forecast, a publication of Robert Prechter’s Elliott Wave International, the world’s largest financial forecasting firm. From Sept. 25 to Oct. 1, EWI is throwing open the doors to all of its investor services 100% free. Click here to join EWI’s free Investor Open House now.
A key milestone in the prelude to the stock market’s 2007 peak came in the week of July 16, 2007, when Bear Stearns announced that two of its subprime mortgage funds had lost nearly all of their value.
The firm liquidated the funds two weeks later and by August a “worldwide” credit crunch was on, as subprime mortgage-backed bonds were “discovered” in the portfolios of banks and hedge funds from Paris to China.
The Dow Jones Composite Index topped that week and started a 54% decline, but the Dow Industrials and S&P 500 made a slightly higher high in October 2007 before tumbling into their biggest declines since the Great Depression.
By March 2008, Bear Stearns, an 85-year stalwart of Wall Street, was bankrupt and forced to sell itself to JP Morgan Chase.
In recent weeks, the specter of global debt default is once again rearing its head.
On August 1, Argentina defaulted on its sovereign debt, which occurred on the heels of bond defaults in South African and Portuguese banks. Meanwhile, Chinese property companies are starting to fail in the same way that subprime funds imploded in mid-2007.
We think these scattered pockets of default are a prelude to the upcoming debacle. The next, more virulent phase of the credit crisis will focus on government, bank and real estate loans the world over.
A change in social mood is behind the shift, and it will soon affect the stock market.
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This article was syndicated by Elliott Wave International and was originally published under the headline Inside Look: The Specter of Global Debt Default is Once Again Rearing its Head. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.