The problem in the U.S. economy, as best I can describe it, is that there needs to be a re-balancing of equity against debt in the housing market. Some people describe this as the Credit Bubble. It needs to be popped.

The last time I saw such a bubble-popping time was in 1990. A personal experience can serve as a case study. The October 1987 horror in capital markets was a re-balancing of equity prices in a market purge of speculation, but it happened so fast, the problems in the debt markets were not resolved.

In 1990, the lending banks were forced to adjust their books as loans had ballooned and too many borrowers had become over-extended. At that time, the neighbour of my parents had a nice property and home. It was appraised at $1.1 million and there was a $950,000 mortgage against it. The owner ran into business difficulties as the economy hit the wall. The major retailer his company produced catalogs for had decided to cancel that year's catalog, which resulted in a collapse of his business. He tried to sell the house through a series of lower listed prices, finally dropping the listing to $550,000 before knocking on the door of my Dad's home to ask if we were interested in submitting any bid whatsoever so that he could get on with his own bankruptcy and marital divorce. My Dad submitted a bid of $300,000 under foreclosure, which the bank accepted. The point is that the neighbour had to personally re-organize before starting a new life. The bank had to write off the majority of the loan.

This episode has to happen a million times or more in the next couple of years before the U.S. capital market can start a new secular Bull market, like the early 1990's. In the meantime, we are likely headed for a sudden sharp contraction like 1987 that will alleviate some pressure, but not entirely fix the problems.

So, I have started to watch the small local and regional banks, and the Fannie and Freddie stocks, because that is where there must be a serious wash-out before major capital holdings will come out of defensive positions in cash, bonds and consumer staples and be directed to growth equities with long-term expectations. In the meantime, I expect the present volatility to continue, and as I say get worse before it gets better.

Yes, I think the completion of this equity Bear will be brief and sharp, like October 1987.

The shares of some outstanding commodity-sector companies will come under extreme pressure in the next 90 days along with tech, finance and consumer cyclicals.

This period of short-term volatility is a good time to start looking for bargains. As prices are pushed to cycle lows, traders ought to be preparing themselves to accumulate shares of the best companies. The only ones I'd purposefully avoid looking at would be companies linked to housing mortgages " because like 1987 it will take a few more years to clean out the problems.

That whole credit bubble issue will be slow to resolve.

As noted earlier, I'll be spending the whole day at the Toronto Resource Investment Show at the Metro Convention Centre. These are highly speculative situations, but worthy of one's time to investigate.

Besides, it's like a big family and most of the relatives are in town. Many of the others are in Denver at the Gold Forum.