The Credit Virus Spreads Worldwide: Commentary from Money and Markets

Back in 1997, a minor currency crisis in Thailand rattled a few regional market players. But the rest of the world ignored it ... at first. They said it wouldn't matter to the U.S. and would be just a blip on the radar screen.

But soon the decline in Thailand's currency, the baht, accelerated. It went from a gentle slide to a full-scale rout. Before long, currencies in the Philippines, Indonesia, and South Korea began to fall out of bed.

Then regional stock indices later crashed. Our Dow suffered what was then one of the largest point declines on record. And the International Monetary Fund was forced to step in and bail out several economies — to the tune of tens of billions of dollars.

It was a scary time. But compared to what is happening now, the 1997 crisis looks like a day at the beach. Right now ... in far-flung corners of the world as diverse as Iceland, Hungary, Argentina, India, and elsewhere ...

Currencies aren't just declining. They're crashing.

Stock markets aren't just falling. They're collapsing.

Foreign investors aren't just walking for the exits. They're running ... and trampling anyone in their paths.

You may not keep a chart of the Hungarian florint, that nation's currency, on your screen. You probably don't look at Argentina's Merval Index very often, if ever. And you may have never touched an Icelandic krona in your life.

But if you could look at charts of all of these obscure indicators, like I have, or if you studied the fundamental behind the moves, as I have, you would conclude the same thing that I did a while ago: The virulent credit virus has spread worldwide. And that has serious implications for you and your portfolio. Here's more ...

Crisis in Hungary, Argentina, Iceland, oh my!
In Hungary, the currency has been plunging for weeks on end as global investors pare risk and withdraw funds from higher-risk emerging markets. The forint recently traded at 214 against the dollar, a huge decline from the 143 level back in July. In other words, one U.S. dollar buys many more forints than it did a few months ago.

That prompted a serious reaction from the Magyar Nemzeti Bank, Hungary's central bank this week. It jacked up the nation's benchmark rate to 11.5% — an increase of a full three percentage points — to defend the currency and stem the flight of capital.

Meanwhile, in Argentina, the country said it plans to seize $29 billion of private pension funds. This caused bond yields in the country to surge. The Merval stock index plunged 11% on Tuesday, then another 10% on Wednesday. It is down more than 55%on the year.

The government last raided pension fund investments to service its debt in 2001. But it didn't help. Argentina then defaulted in a move that sent shockwaves throughout the global capital markets.

As for Iceland, the market has all but collapsed. The country's three biggest banks have been nationalized. Its currency has lost more than half its value in the past two years. It's being forced to pursue a multi-billion dollar bailout from its Scandinavian neighbors and the IMF.

The most shocking of all: Its benchmark stock market gauge, the OMX ICEX 15 index, has plunged 89% year to date! To put that in perspective, if our Dow did the same thing this year, it would be trading around 1,460.

Even bigger countries, like India, are running into trouble. Overseas funds dumped a record $12 billion of Indian shares so far this year. Foreign exchange reserves have dwindled by $42 billion as the Indian rupee has imploded. It recently slumped from 39.20 against the dollar to 49.50 — a record low.
Bottom line: The credit virus is now spreading its sickness to the four corners of the world.

What it means back home
Some pundits have made a big deal about the recent improvement in certain domestic and developed market credit indicators. The gains stem from the Federal Reserve's and Treasury's largesse, as well as the banking bailouts being put into effect in continental Europe, the U.K. and Canada, among other places.

But the improvements have been minor when compared to the hundreds of billions of dollars in aid that has been thrown at the markets. There are also disturbing signs that the aid isn't getting at the core of the problem — the housing market.

One indicator of ongoing weakness there: The latest Mortgage Bankers Association figures on home loan applications. The group's index, which tracks demand for home purchase and refinance loans, plunged 17% in the most recent week. The purchase application sub-index is now plumbing depths not seen since October 2001, a sign that housing demand remains anemic.

All of these problems are now coming home to roost — again — in the U.S. stock market. The Dow plunged 232 points on Tuesday and another 514 points on Wednesday. Despite yesterday's bounce, it appears to be headed much lower over time.
I hope this underscores the message Martin and I have been preaching for months on end ...

Stop listening to the happy talk out of Washington.

Understand this is a dangerous, treacherous economy — and a market with many potholes, time bombs, and hazards ahead. You have to come at it with a clear head and a realistic approach.

Stay the heck away from vulnerable stocks. Maintain high levels of cash in safe investments like short-term Treasuries or Treasury only money funds. Or, if you're a more aggressive investor who's willing to go on the offensive, consider shooting for big profits using vehicles like inverse ETFs and put options. They're making some investors a killing in this market.