In the beginning of 2009 I predicted that we would see a cyclical bull market in an ongoing secular bear market. With unprecedented financial stimulus packages and record low interest rates my belief was that the cyclical bull would run all year long.

World stock markets has indeed made an impressive recovery and seen increases between 30-80% in just three months. However the stimulatory effect of the massive liquidity injections has already started to wear off and liquidity is once again drying up.

If worldwide multi trillion dollar financial stimulus cannot push markets higher than this, the underlying deflationary forces must be huge and we have now likely entered the famous "liquidity trap", which means that central banks can provide all the liquidity they want but if banks are afraid to lend and consumers are afraid to borrow, credit cannot expand. Combine this with a big and swift increase in consumer savings, rising unemployment and an increased desire to pay down debt and you have the recipe for a severe credit contraction, deflation and collapse in consumer demand.

The background to this situation is the enormous debt burden that has been amassed during the last 25 years. In 2007 this huge debt could no longer be serviced and the contraction started. The bear market so far is the worst since the Great Depression and the trillions of dollars in wealth destruction has turned the psyche of the world from positive/expansion to negative/contraction for the first time in seventy years.

This new negative mood has led to rising risk aversion and geopolitical tension which increases the risk for further market disappointments. The saluted recovery seems to be on thin ice and when it breaks (probably this summer or early fall) market participants are likely to panic as the market enters its final phase of liquidation. The last phase is usually the worst, where markets tend to collapse by more than 40% usually in less than a month. I would not be surprised if this final liquidation is preceded or shortly followed by some geopolitical event of great magnitude.

The last bear market phase is likely to pull the rug from all asset classes so there will be nowhere to hide except cash. When the dust settles the best stock buying opportunity of the century will emerge, make sure you are liquid now to take advantage of it.

Conclusion:

If the banks do not want to lend and the consumers do not want to borrow and instead are focused on paying off debt and saving more money at the same time as mass mood is falling and geopolitical tension is rising, we have the perfect setup for a credit contraction and stock market crash followed by economic depression.