According to some, the stock market has reached a “capitulation bottom“–nearly 3 billion shares traded on the NYSE Friday, and there’s hope that investors have finally let out all that bad energy, or whatever the heck was that caused them to get their panties in a wad. Now the wonderful work of Paulson & Co. will start to reinflate things, and All Will Be Right With The World.

Nazzo fast, Guido.

There are other folks, including yours truly, who disagree. (Please note, I am not a finance professional. I just follow this stuff because of my own financial interests.) I think this is the end of Act 1.

My belief is that we may be seeing the end of the sub-prime/Alt-A crisis and direct effects of those, if we’re lucky. But there are forces on the move that are going to cause us more trouble–a lot more–if things don’t change.

John Mauldin reports loans for commercial construction (things like apartments and shopping centers) are starting to have problems–the default rate is rising. From the graph he provided today, it won’t be as bad as the housing problems, but on top of the damage already done, the effect will be out-sized. (What, you want the graphic? Go subscribe. It’s free and highly useful.)

I’ve also been seeing reports (Mr. Mauldin being the latest, also in his current newsletter, but first on Timebomb 2000 in this thread (and yes, if you aren’t a member there, you ought to be)) that the little-known but widely used instrument of “letters of credit” are not worth what they used to be. As individuals, we never see these–but the folks who ship goods around the world (such as grain) live and die by these things.

You’ve heard the catch phrases about a “lockup in lending” or similar. Consider the effects of a lockup in global shipping, caused by a lack of confidence that you will be paid for the goods shipped. Let’s try out the phrase “global economic collapse” and see what it tastes like.

Ack! Uck! *spit* *spit* *spit* *spit* Gimme some water to wash this crap out of my mouth! Whata tryin’ ta do–kill me?!

Joking aside, this will be far more serious than what we’ve seen so far if it progresses unchecked. A cessation of global trade will bring nearly every county in the world to its knees in fairly short order. Every country imports some large fraction of what they need these days, thanks to globalization. For those of us in the US, consider the consequences if we were unable to import oil and natural gas. Not a pretty thought, is it?

I offer no prescription to solve this problem. What I do offer is warning that just because a few folks are saying “Yipee, it’s almost over!” doesn’t mean that it actually is. Keep your guard up.

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