How far can we fall?
How ugly are things going to get?
How likely is a 2008-style meltdown?
I have a two-word answer for you:

Dow 7,000!

That's an incredibly likely downside target. So today, I'm going to lay out my shocking case for a 4,000-point drop — and tell you what you need to do right away to protect yourself from it!

European Bank Run Every Bit as Serious as 2007-2009

European policymakers would like you to believe we can never have another Lehman Brothers-style implosion. They want you to believe that their banks are safe ... that the markets are just going through a temporary soft patch ... and that they have the political willpower and financial ability to plug all the holes in the financial dike over there.

Don't listen to that malarkey! The markets are telling you the exact OPPOSITE story! Just consider ...

• * Earlier this week, Greek 2-year note yields surged above 50 percent. FIFTY PERCENT! Subprime credit card borrowers don't even pay rates like that, which tells you everything you need to know about how serious their debt crisis is.
• * Italian bonds just fell in value for 11 straight days, erasing most of the gains notched after the European Central Bank agreed to step into the breach and buy Italian and Spanish bonds.
• * Belgian bond yields just blew out to the widest premium against core German bond yields since the euro currency was introduced in 1999! That indicates the crisis is spreading even beyond the so-called "PIIGS" countries.
• * Then there's the Credit Default Swap (CDS) market, where professional investors buy and sell insurance against bond defaults. The cost of protecting against losses on senior bonds issued by 25 major European banks and insurers just surged to the highest level ever — 278,000 euros per year for every 10 million euros in bonds!

Not convinced yet?

Then look at the Euribor market, where European banks lend short-term money to each other. It's going haywire, with the cost of borrowing surging there just like it did here in the U.S. in 2007-2009.

Two-year swap spreads, which represent the cost of exchanging fixed-rate income streams for floating-rate payments between derivatives traders, are also blowing out here in the U.S. That last happened in 2008. And it signals that banks are increasingly worried about counterparty risk on interest rate trades.

European banks are squirreling away their money with the ECB instead of lending it.

Plus, the amount of money that European banks are parking with the ECB — rather than lending to each other — is skyrocketing. It just hit 166 billion euros, the highest since last August.

Bottom line: Every reliable popular and esoteric credit market indicator I follow is flashing bright red ... just like they did in 2007-2009!

U.S. Economy Sinking toward 2009 Levels ... or Worse!

If all the problems were "across the pond," as they say, our markets could potentially shrug off some of the European selling. But they're not! Here in the U.S., the economy is clearly slumping toward recession for the second time in the past couple of years.

The hard evidence?

• ==> Our country created precisely zero jobs last month for the first time since the 1940s. ZERO! Job losses were widespread across a wide range of industries, from construction to manufacturing to retail.

As if that weren't enough, average hourly earnings actually FELL ... the first time that has happened since January 2008. Over the year that followed, the Dow plunged roughly 4,000 points.

• ==> The Conference Board's consumer confidence index just sank to 44.5 in August from 59.2 in July. That was the worst reading since April 2009. At that time, the Dow was trading around 8,100 ...
• ==> GDP grew at a rate of only 0.4 percent in the first quarter. The last time the U.S. economy grew that slowly, the Dow was trading for around 7,500 ...

The number of home buyers applying for mortgages has taken a header.

• ==> The Philadelphia Fed index just tanked to -10, the lowest since March 2009. The last time it was this lousy, the Dow traded for roughly 7,200 ...
• ==> Purchase mortgage application activity just slumped to its lowest level since December 1996. The last time this few home buyers were applying for loans, the Dow was going for 6,300.

Bottom line: Major European and U.S. bank stocks are plunging to levels last seen in the 2007-2009 crisis. Key economic data is slumping to levels last seen during the 2007-2009 crisis. And credit market risk indicators are soaring toward levels last seen in the chaotic days of 2007-2009.

So I ask you a simple question:

"Why shouldn't the Dow plunge back toward those levels too?"

Wall Street pundits have no good answer for that. I bet your broker wouldn't if you asked him or her, either.

Yet I'm here to tell you that it's not only likely we hit Dow 7,000, but that you don't have to just sit there and let a 4,000-point Dow decline rip your portfolio to shreds again! You can — and should — take protective steps immediately ... and even consider shooting for PROFITS from a major downside move.

Source: moneyandmarkets.com

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