Concerned investors are, shall we say, paying close attention to 2008 scenarios and the ripple effect the home mortgage mess may have on stocks, bringing down real estate, gold and the broader economy.

sweat bullets can be more like him. Many informed investors are now sweating bullets about what 2008 holds.

That’s right. The order of magnitude of the housing financial crisis, and its potential to widen and deepen, is far greater than the typical American man and woman who watches the television news suspects. If they suspect something.

So what could happen? How bad could it get? Is there a mother shake waiting for us? Or a severe, baked milkshake?

Or could it, as with countless “paper hazards” in the past, somehow slip past us?

Have you ever seen one of those domino displays? Someone pushes a domino – just one, mind you – and it leads to a mesmerizing chain reaction that eventually topples each and every domino in the complex design. Well, if we can compare our complicated economy to one of those cool designs, here’s a ripple effect that (as plausible as it sounds) we hope never happens.

domino trigger

Could consumer spending be the domino trigger, the one that topples all the others? Yes, and for good reason. US consumer spending is the engine that drives the world economy. Our enthusiastic buying of cheap imports keeps China happy, and our ridiculously high-priced gas tank keeps the Saudi sheikhs in silk.

Which, surprisingly, can be a very good thing as both nations (plus other Gulf States) have nearly $3 trillion in cash reserves and are of course quite unhappy with the direction those dollars have taken in recent years. years. The nuclear option has even been threatened, with China and the Middle East dumping their dollars in favor of the euro and a basket of other currencies.

So far, the great antidote to that nuclear option has been the American consumer: As long as Americans are spending heartily, China and Saudi Arabia don’t seem particularly happy. They show little interest in burying the very people who buy their stuff.

But if that spending stops, all bets are off.

The Fed’s Hail Mary pass

So… what is the outlook for 2008 for the American consumer? Here is the one word answer: Accommodation. With housing in historic trouble, “ATMs” in America’s homes are effectively shut down. There will be no more loans against the high appraised values ​​of our homes, not when, in some areas of Florida, for example, houses are already selling for half their 2005 value.

This is a serious matter. Wells Fargo Chairman John Stumpf certainly didn’t mince words: “We haven’t seen a national housing decline like this since the Great Depression.” Stumpf is by no means a lone voice in the wilderness. “I’ve never seen the market this bad. And it could get worse,” said veteran Wall Street analyst Ivy Zelman. Quotes from similar sayings could fill this article.

Arguably, the Fed’s response to this looming cataclysm is its response to everything else these days: cut and print. Reduce rates and print more dollars. The thought here is that cut and print it will lead to even weaker dollars, subsequently stocks looking cheaper to foreigners and, the Fed sincerely hopes, an eventual stock market rally. And that would include Joe and Jill’s average 401ks.

Will this Ave Maria pass work? Will stocks rise and, even with the housing crash all around us, will we be buoyed enough to keep spending until the crisis is effectively over?

Ask: Do most Hail Mary passes work?

The dreaded domino effect

Okay, just to cover the bases here, let’s see, in the worst case, what could happen in 2008.

In the third quarter of 2007, foreclosures surged to their highest level since the Mortgage Bankers Association began keeping records in 1972. Just as ominous, homeowners behind on their payments rose to as high as 21 years. That frightening trend continues well into 2008.

With so many people losing their homes or working second or third jobs at McDonald’s just to make their payments, buying the latest big-screen HDTV isn’t just not a priority, it’s not even a consideration. Neither is a new dining room set, a fishing boat, a state-of-the-art computer, or a digital sound system. These are all discretionary purchases, luxuries that hard-pressed people can do without.

Consumer spending tanks.

The Fed continues with its cut and print strategy but, like the drugs given to an addict, it seems to have less and less effect on the markets. Maybe that’s because there’s a credit crunch going on right now: no one is borrowing and no one is lending, not to mention the fact that the banks are in dire straits. Some estimates put its next subprime losses at up to half a trillion dollars. Some estimates put it even higher than that. It’s hard to throw a party for the latest rate cut when the house is on fire.

As the Fed expected, with the dollar hitting record lows virtually every week, foreign money is now moving into “cheap” US stocks. But it’s not happening fast enough and, weighed down by negative consumer sentiment, the market isn’t growing high enough. People aren’t exactly thrilled with their meager 401k.

Meanwhile, China and the Gulf States are now getting hit with a double whammy: Their $2.7 trillion in cash reserves are losing value almost by the minute, thanks to the Fed’s excessive rate cut, AND their income from US consumer spending is plummeting.

Scary enough, the nuclear option is now back on the table.

What happens if China and Saudi Arabia play that option? That is another story for another day. Suffice to say, with a faltering economy and a decimated dollar, people are desperately looking for another means of saving and trading. Something universally accepted by sellers and buyers alike, which, unlike paper money, has never been worth anything, no matter what banks or governments have tried to do throughout history.

Prayed.

At that point, an ounce of that shiny stuff could be worth more than $1,000. Maybe even more than $2,000 or more. Who knows? What you need to know, whether the domino is crashing like in this no doubt dark scenario or there is a possibility of it happening to you, your family, your stock or your home, is that gold still works. like ultimate money and ultimate diversification. ..particularly if your portfolio only contains, well, paper.