As we indicated many weeks ago the subprime virus finally spread throughout the system and things can still get a lot worse. It seems a lot like the 1973/74 situation when oil prices exploded, house prices fell and eventually a banking crisis took markets down and the economy into a recession. What does it mean? Well it supports even more our inflation scenario which we have been talking about for a long time. There are billions being printed which comes on top of the price increases in soft commodities which we mentioned at length before. Gold should be the real beneficiary from this loss of credibility in the banking system and the inherent inflation. Real estate and stocks normally benefit as well, but not until a recession or a possible meltdown of the banking system can safely be avoided and confidence has been restored. Until then stock markets are like to keep trending down with the exception of a few (but strong) relief rallies.
I would expect the first relief rally early next week as a lot of money has been pumped into the system and many indicators are extremely oversold, but as long as more banks and money market funds are being closed I would not be so brave as to build new long positions. We are rather going to use those expected relief rallies to build further short positions in the expectation that this downturn is going to get nastier quite soon.

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