We are told constantly by Wall Street operators and cheerleaders that we are now experiencing and possibly could expect to see a further stock market correction and that stocks look cheap, representing a great buy.

Don't be fooled!

A headline article in The Financial Times this week read, "Fed move fails to avert rout in markets, as credit fears grew."

What concerns me about this "correction" is that it follows such an enormous, cheap, liquidity-driven boom.

For example, as the Economist pointed out a few months ago, the value of residential property in the developed world had risen by some $25 trillion in just five years.

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Think about that: If you were to count to just 1 trillion, counting one number per second, it would take 31,000 years. Twenty-five trillion is truly a staggering number.

When you realize that the number is more than the combined GDP of all the developed nations, it is truly amazing!

Which begs two crucial questions: First where did all that money come from?

The answer is, of course, leverage on an unprecedented scale. As we have often pointed out, a hedge fund can leverage its capital a staggering 52 times, using property-related derivatives.

The second question is, "Who invested in these so-called 'securities?'"

Remember that the derivatives market now stands at an estimated $440 trillion. That is a number so huge that many people may wonder if it is just "cyber" money. And, they might ask, "Who is behind it all?" Another good question.

The Financial Times of Nov. 23 contained a most revealing article of how treasurers as far afield as northern Norway (inside the Artic Circle), invested their town's assets in high-yielding U.S. subprime CDOs!

So the money for what has been by far the largest real estate boom in history was drawn from all over the world. Furthermore, as the treasurers of some now financially troubled Norwegian towns allege, sometimes by fraud.

[Editor's Note: Special Report: 5 Ways to Profit From the Housing Bust.]

A further, emerging problem is that, following the recent ruling by Ohio Federal Court Judge Christopher Boyko, the ultimate ownership of the underlying real estate is far from clear, leaving many holders of CDOs unable to foreclose. They own, potentially, nothing!

All in all, the property debacle presents a most worrying picture of massive losses.

At long last, while the Fed, the government and Wall Street's cheerleaders continue to deny reality, some prestigious observers recognize the trouble ahead.

Former U.S. Treasury Secretary and Harvard President Larry Summers wrote in the Financial Times that the U.S. economy is in far deeper trouble than most people understand.

I agree with Larry Summers that we, in America, face an extremely serious economic situation, just as our dollar price illustrates.

As America is still the economic engine of the world, a serious economic problem in America is likely to spread to the world economy.

Reverse leverage is painful. We are coming out of the largest leverage "fandango" in history and there is likely to be a lot of pain.

Recessions are usually led by falling consumer demand. Both effects, the decline in demand and the recession following it, are normal and healthy, so long as they are kept shallow.

Recessions become economically damaging and acutely painful, however, if they are allowed to become severe or morph into depression.

Serious sales downturns are now being experienced in the retail sector, even amongst prestigious names such as JC Penney and Target. The consumer index plunged to a low of 87.3, down roughly 10 percent in the past month.

I feel, as I have said before, that the GDP figures published in early 2008 will show that we actually entered recession in the last quarter of 2007.

[Editor's Note: Cash and Banks at Risk? Protect Your Wealth Now.]

What is worse is that this recession comes off a highly leveraged boom and it is being led, not followed, by a credit crisis and real estate collapse.

In addition, our Fed appears to be acting only upon lagging data. It is likely to be slow in lowering key rates enough to avert a severe recession.

It is well known that, depending on the exact shape and level of the yield curve relative to the economic situation, it takes between nine and 24 months for a Fed rate cut to boost the economy.

With that in mind, I feel that our Fed is already well behind the curve and unable to avert a recession.

The big question is that, if our Fed continues to delay a major cut of some 2 or even 3 percent (to 1 percent) on key rates, it may not be in time to avert a serious, severe recession.

(It is of interest to note the fact that interest rates kept too high for too long drove the 1930 recession into the Great Depression of 1931.)

Our short-term Treasury market appears to have experienced a flight to safety as a result of the current credit crisis. To some, it would appear to indicate a call for a cut in interest rates.

Many on Wall Street still maintain that our economy is merely slowing down and remains unlikely to slip into recession. They believe that the current 10 percent "correction" makes stocks look cheap!

I believe this to be a serious misread of the real situation and that items are cheap only when the price is expected to rise — not fall!

I feel that both the current and leading evidence (consumer price index and falling sales figures) indicate that we are already in recession and that the Fed — if it cuts rates on Dec. 18, will not cut by enough to avoid a serious recession — a phenomenon that would be felt worldwide.

Stock markets can be expected to "bounce" off support levels and to rise, for a time, on interest rate cuts.

However, I believe that the so called "correction" in our stock markets portends a stock market collapse within the next six months as the evidence of a recession, perhaps a deep recession, becomes increasingly irrefutable

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