The next leg down: borrowers with good credit now defaulting

Over the past 36 hours, equity markets have been staging yet another relief rally. Days and even weeks of counter-trend rally are typical within on-going bear markets such as the present cycle. Bear markets typically grind investors down in fits and starts of hope and fear a few times, before a final wave of desperation selling brings the ultimate capitulation and a lasting bottom.
This recent swing of hope has come on falling crude prices and some better than expected earnings reports from a couple of companies such as investment bank JP Morgan this morning. But even while JP Morgan executives reported on a better than anticipated second quarter, the company sounded strong warning bells over growing trouble in the US mortgage market. Soaring defaults on sub-prime mortgages have been a big problem over the past 18 months, but it seems the next and likely bigger default wave is now underway: defaulting prime mortgages.
CEO Jamie Dimon was trying to prepare analysts and investors for the next wave of losses: ““Prime looks terrible,” he told analysts on the call. “And we’re sorry, and there’s nothing else we can say.”
“Dimon was clearly trying to temper investors’ newfound enthusiasm with a dose of market reality:
“Our expectation is for the economic environment to continue to be weak – and to likely get weaker – and for the capital markets to remain under stress,” he said in a press statement. “We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.” See: JP Morgan's Dimon: prime mortgages look “terrible.”
The tragedy of this over-juiced credit cycle has been that even many hard-working, otherwise stable people have been suckered into jeopardizing their financial health with habitual over-spending, negative savings and soaring debt. Default rates are now spreading from sub-prime to prime, from residential to commercial real estate, to credit cards, student loans, auto loans, to municipal and corporate bonds and on throughout the entire financial system.
This is the reason this downturn and market correction are poised to last longer than the average bear.