Standard & Poor's reports that defaults on American corporate junk bonds could more than quadruple in the next year as the declining economy in the United States severely restricts companies' ability to repay their debts.

The Times reported that, "A default on the debt usually leads to bankruptcy and means that bondholders lose some or all of the money they are owed. Diane Vazza, head of global fixed-income research for S&P, said: "Things are going to get much worse yet. The situation in Europe will follow the US."

This is another in a series of indications that the economy is worsening and will have cascading, negative effects for financial assets. It helps make my case for the market to continue to transition lower over the rest of the summer and, probably, the fall.

Newsweek featured an article recently where leading economic experts tackle the global inflation problem.

Of note were comments made by Mohamed El-Erian--a leading authority on the global financial system--on how economic leaders should navigate policy in a challenging environment:

The global economy, still reeling from the U.S. financial crisis, has entered an even riskier phase on account of inflationary pressures. Inflation is particularly painful when it is driven, as it is now, by price increases on essential products like food and fuel. Governments and companies have to react even if they end up using blunt instruments that initially make the situation worse. ...

In normal times, the emphasis on monetary policy would be necessary and warranted. But conditions are far from normal in today's global economy. ...

First, tighter financial conditions, especially higher mortgage rates, will further undermine a U.S. housing market that is already collapsing under the weight of overvaluation, excessive inventories and growing foreclosures. The recent decision by the U.S. Congress to extend emergency assistance to mortgage holders and behemoth lenders (such as Freddie Mac and Fannie Mae) will only act as a short-term Band-Aid. ... Second, growth in emerging economies will also decline as policymakers there realign their domestic priorities. For the global economy, this means slowing the "other" engines that, particularly in the past year, have accounted for a growing share of the increase in world GDP, thereby effectively compensating for the more sluggish U.S. economy.

So where does that leave us? El-Erian's bottom line is that policymakers must respond to inflated food and energy prices. But, he continues:

..in relaying overwhelmingly on tighter monetary policy, and in failing to aggressively pursue enhanced production and distribution channels for food and energy, they risk weakening global demand too much, thereby being potentially forced into a sudden reversal. The rest of us should keep our seat belts fastened as the global economy continues to navigate an even bumpier phase, as weakening growth impulses aggravate the impact of the credit crunch.

From a trader's point of view, El-Erian's comments further reinforce my Trader's Advantage research, which indicates that the current bear market likely has a long way to go...

The economic news just keeps getting worse on the other side of the Atlantic.

Moody's Investors Services issued a report that indicated the number of struggling commercial property borrowers in Europe continues to rise--a conclusion drawn from the acute increase in the number of mortgages on the "watchlist."

According to an article in the Financial Times,

Watchlists are an early indicator of potential events of default or transfer to special servicing, which sees commercial property experts move in to explore the best ways to cure a mortgage's troubles or look at options for a work-out or sale, the agency said in a report published yesterday.

The Moody's report follows analysis from Fitch, a rival ratings agency, which showed a high chance of widespread defaults in the US and UK commercial property mortgage markets if the gloomy economic predictions for those markets were true. ...

"The number of loans experiencing adverse issues is growing, as can be seen from the number of loans which have been added and have remained on servicers' watchlists over the past four quarters," says Viola Karoly, a Moody's analyst and coauthor of the report. ...

"Given that more than 50 per cent of all loans currently on watch are in breach of coverage or loan-to-value covenants, the number of loans defaulting and/or moving into special servicing is expected to increase over the next couple of months and quarters," the report said.

In an interview with The Wall St Journal, former Fed chairman Alan Greenspan offers the most innovative solution to the national residential real estate crisis that I have seen. It's wacky but clever: Change immigration rules to let in a lot more skilled immigrants, who will form new US households and buy excess housing inventory.

He tells the Journal the only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale - and hence help stabilize prices."

This idea is so far out there that it makes a certain amount of sense. He's saying that if you don't have enough native US demand for houses, import more demand. It will never happen, especially in an election year, but it just might work.

Arcelor Mittal (MT), the international steel giant, was reported by Bloomberg last week to be on a drive to augment its development of iron-ore reserves by plowing $6 billion into the development of mines in strife-torn African countries like Senegal, Mauritania and Liberia.

The company believes that it must produce its own iron ore--the key raw material in steel--to control its own destiny. At present, iron ore miners like BHP Billiton (BHP) and Rio do Vale Doce (RIO) control 80% of seaborne trade in the material, and Mittal has been forced to accept price surges of up to 85% in the past year. Mittal has a goal of producing 80% of its own ore in the next 10 years.

That's a great idea from a long-range, fundamental point of view. But in the meantime, I'm very concerned about Mittal's recent decline below its 12-month average for the first time since 2005. I've supported MT for three years, but now is the time to sell if you still own it, as a lot of real negatives are weighing on the stock, including the dollar, the threat of a global recession, and then protectionism.

Once the global economy starts to heat up again, MT will be the first company on my team. But for now, it's more than likely headed lower toward the $60 area from its current perch around $73.

Halliburton (HAL), the world's second-largest oilfield services provider, told Bloomberg last week that the recent 17% slide in crude oil is unlikely to reduce orders for drilling and exploration contracts.

"Customers are basing decisions on significantly lower oil prices, and they plan very long-term projects that don't switch on or switch off based on the oil price,'' CEO David Lesar told Bloomberg. "I don't really see it having a major impact on our business.''

Halliburton opened a second headquarters in Dubai last year and has its biggest operations in Saudi Arabia, where it is the leading drilling services provider for the new Khurais oilfield. HAL just won a contract to provide services at the new Manifa offshore field. The long-term prospects for this energy giant look bright. But if the bear market really takes hold this fall, all stocks are likely to go down together. HAL shares have been hanging in there as well as any of its peers, but watch it carefully. A decline below $41.50, particularly if it's at that level at the end of August, would be a serious sell signal.