Investors would be wise to beware the Bear Market ebb tide that is currently just getting underway.

The old Wall Street saying that a rising tide lifts all boats is even more true in reverse. Once the tide starts flowing out it becomes a dangerous self reinforcing force.

Those investors who still think that the government and Federal Reserve Bank will still somehow save the economy from a severe recession are just not aware as to how severe and dangerous the challenges overhanging this market are. They also underestimate the speed at which unpleasant events unfold to the downside. Many years of price appreciation can be wiped out within just a few months.

The absolute worse fall in housing values since the great depression has no signs of reaching a bottom. Prices could easily fall another 25% from current levels. In Japan, starting in about 1989, real estates prices started falling and in some areas fell 70% from their peak levels before a weak recovery began.

I’m pretty sure that it is the fear of this type of real estate depression that has the Fed Chairman, good old over his head, Ben Bernanke, pacing the floor late at night when he should be sleeping.

As if fears of a complete collapse in real estate, including a collapse of commercial real estate values which is just getting underway, Ben must worry about the trillions of dollars of hard to evaluate, even harder to market, derivatives that fill up the portfolios of investments banks, commercial banks, brokerage firms, insurance companies, state retirement funds, and of course hedge funds.

This portfolio structuring with largely worthless investments is a worldwide problem. Investors and investment managers all over the world forgot about assessing risk in a prudent manner. They were easily convinced by slick high powered Wall Street salesmen dressed up like investment bankers that packaged junk investments were somehow transformed into AAA paper just be a slicing and dicing process.

No, do not underestimate how bad things are going to get with this down cycle. We have entered a positive feedback loop that will prove to many investors that when you make investment decisions without risk analysis as a fond believed in the great fool theory you will someday pay a heavy price as the fools become too scared to but anything else.

We are in the beginning of a powerful perfect financial storm and the tide is rushing out. It’s best to stop dreaming that the government can save you if you fail to take immediate action yourself.

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