Its not bad enough that America’s standing around the world has been severely downgraded by the Iraq War. Now the global slowdown and credit crisis is squarely being pinned on Americans because of their years of living high on the hog, thanks to credit cards, and huge cheap home loans available to anyone with a pulse. The US is really the only country that borrows so heavily against future earnings. To even talk about the size of the national debt, or the size of personal debt in the US appears ludicrous. The numbers are astronomical.

The secured debt (mortgages, car loans, home equity) has now gone bad as house prices have fallen on average some 30% from their peak. Families are walking away from their primary homes in droves as a bottom has yet to appear. There are perhaps a trillion in mortgages alone in California alone that need to be re-bucketed. The car lease business has collapsed as cars coming off leases cannot be sold anywhere near the value car dealers thought they would get at the end of the lease. The next and final leg of the collapse will be credit card defaults. This unsecured debt will usher in the next phase in the credit crisis. As one hot dog vendor said, “my business is down because people want to pay with credit cards and I only take cash”.

The casino mentality in America has led to the crisis in confidence in the credit markets. This will not end well for most people, and yes the rest of the world will pay the price too. The House is finally getting its pound of flesh from these gamblers and don’t look for this to end in 2009. I suspect that once home prices bottom out, somewhere around 40-50% below their peak, we will not see much movement in home prices for at least 4 years. Without cash not much will happen for Americans going forward so look for some very good deals on cars, boats, homes, and anything else that can be sold for cash in the US.

Well, here is the bottom line. I will make this easy to understand as I just deciphered Bernanke’s statement to explain how this will actually work. Let’s assume a bank has a security that has 100 mortgages in it. Five of those mortgages have defaulted, and ninety-five are still functioning as normal. There are two ways to value this security. One is by the “market value” or where the market is currently trading such a security – in this example let’s say this security is trading at a very distressed price of say 50%. This in effect assumes ½ of the 100 mortgages are defaulting or will shortly default. Bernanke says the market is therefore incorrectly pricing this security as the “hold to maturity value” is much higher. So, let’s assume he is correct and the hold to maturity value is say 75% because we can assume more of the mortgages will default in the near future than the current 5%, in the region of up to 25% of them.

Bernanke wants to move this security to the toxic waste taxpayer balance sheet at 75 cents on the dollar, which is above the current market value of 50 cents on the dollar. Now, the bank might be holding this security at anywhere from 50 cents to 75 cents on the dollar depending on which way they pressure their accountants, and thus the bank may take a profit when it gets sold to the American taxpayer. Supposedly, they “should” be marking this security to the current market value of 50 cents on the dollar. Therefore, this bailout is aimed at infusing capital if in fact these banks are marking to market value, or anything below this magical “hold to maturity value” which Bernanke believes is now a more realistic true value. Thus, the devil will again be in the details but make no mistake about this . . . this bailout is definitely going to buy these securities above the current distressed market price, infusing extra money into the banks and spreading the risk of these market values onto taxpayers, albeit at a price that may be beneficial . . . but perhaps not.

If this doesn’t get done then the financial system will freeze up and businesses and individuals will be unable to get any credit whatsoever, causing a massive collapse of banks and businesses . . . at least that is what they are telling us. So, this is how we are going to avoid the 2009 Depression.

Well, the commodity pullback has occurred with crude coming down to $122.5/barrel (remember my prediction back in June of a pullback to that $122 level!) with the test of the $120 level coming soon. What happens after that, who knows but with volatility coming in I think a lower trading range is in order for oil, gold and the grains.

Any of the grains can be bought here with beans below 14, corn below 6, and wheat below 8. This is a major pullback in the grains, some 15% off their highs, and gold has pulled back around 6% from its recent highs. With oil off 15% from its highs around $147/barrel, you have to think that this pullback is near the end. Some consolidation should occur in all these commodities here as bond yields have jumped and the stock market has rallied 3-4% off the bottom. Natural gas is around 9 now after peaking out around 12.5.

So if you haven’t been involved in commodities this year, well, this is an excellent entry point. You won’t hear congress flapping their gums about the evil speculators anymore. Funny how that works. The banking system is still quite shaky and mortgages are difficult to get unless you have perfect credit. I have heard anecdotal evidence that unless you are willing to put 20-40% down, then you better prepare for a big hassle.

Bush is lifting the executive order which his father put in place, banning offshore drilling on the outer continental shelf. This will be interesting, especially if the Democrats call foul and try to block this move. Crude oil futures probably will not care much about this move one way or another as any drilling will take years to have an effect, but it won’t go unnoticed on voters.

Our first tropical depression that has a chance of reaching the gulf has now formed and will soon become a hurricane. It’s a bit early to call its course but look for Nat Gas to pop above 12 on this news. Crude is hanging around 145 right now showing no signs of coming in as the Feds take over Indymac Bank and promise help to Fannie Mae and Freddie Mac by accepting their agency collateral for direct cash borrowings at the discount window, and hinting at some deal for equity holders.

The Fed has really stepped into it again as the dollar weakens on all this and I suspect the 1.60 mark vs the euro will be crossed very soon. Gold continues to rally with $1000/oz in its sights now. Investors are bailing on stocks again as there is simply no support in sight . . . it appears that a big, high volume capitulation is coming soon, most likely taking the S&P down to 1200 or below on an intraday move . . . look for a down 500 Dow point intraday move soon as a temporary bottom.

There are many false rumors flying about banks in the market community right now. The VIX is pushing 30 now, that’s getting up there but it certainly is justified as every rally in the stock market gets beaten down like a red-headed step child. The whipsaw is going to be the case in all commodities for the next few weeks . . . look for extremes in both directions.