Today, there is little liquidity in the securitization or corporate bond markets. So, the multi-Trillions of strategies relying on shorting securities for hedging and speculating purposes have gravitated to the relative liquidity of U.S. equities. And, when it comes to hedging against or seeking profits from heightened systemic risk, one can these days see rather clearly how incredible selling pressure can come down hard on the 19 largest U.S. financial institutions. And when one considers the scope of derivative strategies that incorporate "delta hedging" trading dynamics – where the amount of selling/shorting increases as the market declines (systemic risk increases) – one recognizes the possibility of a marketplace dislocation along the lines - but significantly more systemic - than the "portfolio insurance" fiasco that fueled the 1987 stock market crash.

Importantly, this issue of acute systemic risk has taken a turn for the worst with the recent deterioration in the conventional mortgage market. The highly exposed GSEs, mortgage insurers, and leveraged speculators are positioned poorly to withstand a bust in prime mortgages. The fate of the U.S. Bubble economy today rests on the ongoing supply of low-cost "prime" mortgages. Any meaningful tightening in conventional mortgage Credit – including the lack of availability of mortgage insurance, required larger down payments, and/or tougher Credit standards – would have a major impact on Credit Availability for core housing markets throughout the country (many that have thus far held together fairly well). Such a tightening would put significant additional downward pressure on prices, exacerbating already escalating problems for the GSEs, Credit insurers, and speculators.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.