For investors, the past decade has been like watching tanks rolling over the hilltop to attack the villagers celebrating below, says economist and mutual fund manager John Hussman.
"Repeatedly, one could observe these huge objects rolling over the horizon, with an ominous knowledge that things would not work out well," Hussman writes in his weekly market comment.
"But repeatedly, nobody cared as long as it looked like there might be a little punch left in the bowl."
"We are again at the point where we should be alert for tanks."
Investors should look for signs of risk should read the FDIC’s Quarterly Banking Profile out Tuesday and watch the departure of the chief financial officer of at least one major banking institution early next year, which “might be a sign that all hell could break loose.”
The FDIC reported that its balance fell to negative $8.2 billion in the third quarter, the first time since 1992 that it had a negative balance.
In addition, the number of banks on the FDIC's "problem list" rose 33 percent during the third quarter to 552, the highest level since 1993.
Hussman warns that though much of the subprime mortgage crisis has passed, the U.S. economy currently faces a coupling of weak employment conditions with a mountain of resets on adjustable rate mortgages.
Those loans, written at the height of the housing bubble, undoubtedly carry the highest loan-to-value ratios, Hussman points out.
“The assumption that the credit crisis is behind us is completely out of line with what possibly could result. . . the inevitability of profound credit losses here is unnervingly similar to the inevitability of profound losses following the dot-com bubble,” he says.
According to the Mortgage Bankers Association, nearly one in 10 homeowners with mortgages were at least one payment behind in the third quarter, up from about one in 14 mortgage holders in the third quarter of 2008.
This number is the highest since the association began keeping records in 1972.
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