A couple of days ago, Asian and European stock markets experienced their biggest multi-day declines since April 1990. Tokyo, Bombay, Hong Kong, Frankfurt, London… all lost five, seven, even 8% and billions of dollars in valuation within a few hours of trading.

Pundits were quick to attribute the drops to recession fears — not just for the U.S. but for the global economy.

The declines prompted helter-skelter reaction from the Fed, with a whopper of a rate cut. Which in turn hit the dollar hard and sent gold back up.

Now, here is a question: Over the past year, central bankers, newsletter editors and economists have sung the praises of the strength of all those economies we watched crashing last Monday. After all, they have extraordinary trade balances. They pride themselves on being export world champions… like Germany. Pat their own backs for recovering from decades-long economic stagnation… like the EU and Japan. Or are busy preparing grand old coming-out parties as the world’s new superpower… like China.

And yet, all it takes to derail their stock markets is a few thousand U.S. homeowners with patchy credit reports to fall behind on their three-bedroom McMansion.

Right now, there are no indications that U.S. households are anywhere close to changing their habits. Household debt, new and old, is being serviced from growing incomes and full employment. But there are indications that a mood is spreading that is less enthusiastic than it had been in past years.

So if the very idea that the U.S. economy may grow less vigorously than in previous years can trigger a stampede from the world markets, what if the U.S. customer did indeed cut back on his spending, as my colleagues have predicted for years, with the same success rate as hurricane season forecasters?

The chain reaction is indeed quite foreseeable. U.S. unemployment will increase at the same speed as the ability to service household debt will decrease. We may see unemployment rates double, almost reaching European boom levels of 10% or more. This would be followed by a shake-out in the retail, automobile, and consumer credit industry.

China’s overheating economy may cool down faster than even Beijing has intended. In the short term, any lag of exports to the United States may be made up by a fresh new wave of American jobs being exported to China and India, as American companies begin fighting for margins by reducing labor cost. And as a new Democrat government penalizes businesses and individuals with higher tax rates, a slew of companies may follow their jobs abroad.

Razor thin economic growth margins in Europe and Japan that have been celebrated over the past two years as indications of healthy economies will quickly melt into nothing. Domestic demand, meager at best, will not be able to make up for the reduction in U.S. consumer demand.

The fate of oil and commodities, hailed by many as “contrarian” cure-alls of financial ills, may not be quite as glorious as people have come to believe. If their performance in the latest dip is any indication, they, too depend entirely on the willingness of Joe Sixpack to spend on credit. Oil will plummet as industrial demand begins to look shaky. Gold may extend its run a bit farther, as investors begin clutching at straws and the time-honored myth that gold is a good inflation hedge. Eventually, I believe that all those precious hoards of rare coins may indeed turn out to be investments on the same level as Hallmark Christmas ornaments.

A similar fate may be in store for those currencies that have appreciated disproportionately against the U.S. dollar in recent years. Economies who depend entirely on a bankrupt customers represent no real value. We will see the euro and pound sterling enter a down cycle, which in turn will exert pressure on gold prices.

The good news is that this scenario will not fully unfold this year. emergency patches in economic policy (called stimulus packages) and especially China’s unfaltering commitment to party like its 2008 will keep events like the January 21-22 market correction temporary events. Market volatility will provide some limited opportunity for cautious traders to make some serious short-term gains in hedged plays on domestic and international markets.

Overall, however, I believe it’s about time to circle the wagons. The Bush era will come to a much-anticipated close in less than a year. So will many of the opportunities to make money.

J. Christoph Amberger
Todays Financial News