Credit Crunch Resolution: A Catch-22

There is a lot of talk about how the credit crunch currently gripping the world economy can be resolved. The most popular view, by far, is that this cannot happen until the housing market begins to stabilize. Unfortunately we find ourselves in a “catch-22.”

The housing market cannot stabilize until the credit market stabilizes, and the credit market cannot stabilize until the housing market stabilizes.

You see, the housing market requires healthy credit markets to allow borrowers access to mortgages. With the sub-prime and Alt-A mortgage market decimated, many potential home buyers can’t get a mortgage, even if they wanted one. So the housing market will continue to see foreclosures and huge supply, while demand will continue to decline.

The only wild card in this is the government. If they don’t provide borrowers with the ability to avoid foreclosure and allow home buyers access to mortgages through a federal program, this self-destructing downward spiral will continue.

It’s important to note that over a long period of time (3-5 years plus) the housing market will correct itself, regardless of whether the credit markets stabilize. Those who think that the second half of the year will show signs of improvement are sadly mistaken. If I were going to guess, I would say the housing market doesn’t reach a bottom until late 2009/early 2010. Only then will the credit markets stabilize.

We have a long way to go, folks. So how do you profit from all this? You could capitalize on this downturn by purchasing shares in SKF, an ultra-short ETF that goes up 2% for every 1% the US financial stocks go down. Quite a good play for these times. Or you could short some of the bigger banks like Citigroup, JP Morgan and Goldman Sachs. And don’t forget those lovable investment banks like Lehman Brothers and Merrill Lynch; they’re prime shorts as well.

Invest carefully.

Freund Investing Managing Member Ryan Freund holds a short position in Lehman Brothers and no position in any of the other companies mentioned in this article. Freund Investing has a solid Disclosure Policy.