Housing turnaround, sub prime mortgage crisis? Bat shit!

What happened this week? Central banks poured in millions of dollars into their financial networks to preserve "liquidity". Have you asked yourself, why did this occur, and who gained, who lost?

The first answer from the media is that sub prime mortgage failures are "correcting" the market. This leads to fears that support markets for mergers and acquisitions are drying up. Don't let these loudly hyped theories beguile you into believing them. Let's start by analyzing these statements.

Housing:
According to data from yahoo finance, housing accounts for 5 percent of the economy. If housing fell by 15 percent, that would mean an economic fall off of less than 1%.

Sub-prime mortgages account for less than 25 percent of mortgages at their highest percentage per state. Of these, about 20 percent are delinquent in some way. The loss on these assets if they are foreclosed and sold will be much less than what the mortgage brokers charge transaction fees for all mortgages.

Recession:
The economy is not in a recession. Any place where construction projects are scheduled, there is a labor shortage, not a surplus. The reason for a decrease in market value unrelated to housing markets is that speculators have sold large portions of their assets for fear that other speculators will do the same, driving down market value.


The real crisis:
From these few facts, the sub prime mortgage market cannot be responsible for the recent financial activity. It's possible that hefty asset sales from speculators would result in the recent losses, but I find that unlikely because most of the losses occurred before markets opened. I'd expect a steady loss throughout the day if speculators were selling assets.

I cannot directly say my theory for what is really behind the financial activity last week, for I'd fear for my own life. However, here are some clues for you to make up your own mind. Foreign central banks poured in more than 10 times the amount of money into the market than the US did, and the US central bank was reluctant to respond. The strength of the US dollar has fallen. The price of gold has fallen in US dollars. It is well known that a crisis in the foreign markets will have a dramatic effect on the US markets. Foreign countries have poured money into the US so that the US currency does not devalue drastically. The price of oil is still near record highs. All of these clues are linked together by a common aspect. This aspect is likely the real reason behind last week's financial activity.

Profits:
To profit in these market conditions, one can either stay one step ahead of the speculators (highly risky and difficult), or understand the reasons for market behavior and create positions to profit from the next steps that are likely to occur.