Where are the Scandals?

As a bear market progresses, one thing always happens – scandals. But have you noticed that there haven’t been any ‘Enron’s’ to speak of yet?

Don’t think it’s going to stay that way though. And here’s why…

As people spend money, they create an economic expansion. As the expansion progresses, certain sectors start getting most of the money. As that sector gets more money, investors are lured in and add even more money. In the last expansion, that sector was clearly real estate.

So now you have a sector that has more money than should be there. Since consumers are feeling good about the future, they are willing to spend more money than they should on something basic, like a home. Of course, businesses will do what they can to keep this momentum going. And that includes dirty little tactics.

But eventually consumers will be spent. They just can’t spend any more money on an expensive home.

Once home prices level out, the investors get spooked. So they start selling. As they sell, prices start to drop. So now homeowners get spooked, because the home they bought isn’t worth what they paid for it. That gets them depressed.

And if anyone fell victim to the dirty lending tactics, then they get screwed as ARMS reset and subprime loans balloon. What does that cause? Foreclosures.

So now foreclosures and home sales tick higher. All the industries that relied on that money starts losing money, and what starts off as a housing problem, turns into a consumer spending problem.

And then that becomes a credit problem.

As people lose their homes, their retirement and their savings, they get pissed off. Who’s to blame? Is it the banks, the Fed, maybe Bush?

This is where we are now. People are looking to blame someone.

Just a few days ago, the Feds started an investigation on 14 different lenders. And I have a feeling they are going to find something. And after they do, they are going to look for someone else to blame.

You can be sure these scandals will knock the market down as it did during 2001-2002.

We’re in the start of a recessionary period. And that recessionary period won’t come to an end until we see people getting blamed and tried for the excesses the previous expansion brought.

Once I see these scandals come out of the wood works, I’ll start hunting for the bottom of this bear market.

Until then, I’ll short the living bejesus out of every weak, overpriced stock I see.