MONTE CARLO, Monaco (IHSL) -- For years, greed has been the underlying force in the markets. Now fear is replacing it.

Once underway, fear is an even stronger force. While central banks try to hose down the market's fear-flames with money, it doesn't change the liquidity problem. Lenders fear to lend and borrowers fear to borrow. Money "in the system" is of no real help. Someone has to borrow it. Who will?

“ The modern financial world runs on credit, so if fear rises to a level where fewer are willing to lend -- and fewer are brave enough to borrow -- the situation can get a lot worse before it starts improving. ”

We're back to being unable to push a string. We're into the very early beginnings of the unwinding of the derivatives hurricane long forecast by Jim Sinclair (jsmineset.com) and myself.

Only the innocent will fall for the line that two failed funds from Bear Sterns BSC, -10.00% and one European bank fund were the only real problem, which caused the main central banks to massively push money into play, and repeat it and repeat it.

Shallow thinking. Into play they hope. The money just sits there waiting, hoping, to be used.

The modern financial world runs on credit, so if fear rises to a level where fewer are willing to lend -- and fewer are brave enough to borrow -- the situation can get a lot worse before it starts improving. In my opinion, we've entered that twilight zone and it will get worse and we'll see a torrent of foreclosures over next 12 to 24 months. The "other shoe" will be falling for a long time, so investors should stop waiting for the markets to "calm down." Instead, they should fix the roof of their financial houses.

Among things to do:

Assume the worst scenario is possible and plan for it. If it doesn't reach that stage, you won't have lost traction but bought yourself peace of mind and financial insurance. If you own the high yield currencies (I do), switch partially to low yielders for now. My favorite is the Swiss franc. Pays near zero interest but chart is bullish, so should give you capital gain. See currencies. Worry about banks (all of them). Time deposits, even current accounts, in Europe, U.S., Canada and Asia banks are at risk if the bank goes under or takes a "bank holiday" (1933). The only things safe from bankruptcy to keep in a bank are: gold bullion (if in your own safe box), stocks and bonds. Stocks and bonds are kept in safe custody accounts so they are ok if your bank tanks. (Some world banks have insurance, but it's under $12,000. In the U.S., FDIC insurance is $100,000, which is nice but not sufficient for most middle income citizens, nor is it immediately payable in most cases. Additionally, not all US banks have FDIC insurance.) Cut your stock positions down if you are too heavy there and/or use stops. Hold mainly oil, natural gas, base metals and precious metals. In general stocks, stay with big, big caps. Reduce your U.S. dollars to near zero on the present rally, which should move up (on the U.S. Dollar Index) to 83 before topping.

There is much more to say but no time remains to say it. I close with this: From fear we're morphing into panic.

The able George Magnus of UBS UBS, -0.54% says the "Minsky moment" is coming, when credit dries up even to sound borrowers. Only panic is left.

I hope this scares you into doing something, even though it most certainly won't be enough. Bon chance. Good luck.

Uncle Harry

Harry Schultz has been writing The International Harry Schultz Letter for 42 years, making it one of the three oldest private investment newsletters. He also publishes a weekly gold charts advisory called Gold Charts R Us. (hsletter.com)

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