I’m seeing surprising new developments in two major markets that could have HUGE implications for you and your wealth.

Before we get to those, I want to give you a quick update on something else that poses a continuing threat to your prosperity: The fiscal-cliff fiasco in Washington.

Last week we talked about how the “happy talk” photo op we got from President Obama and his Congressional co-negotiators was just that — talk. Sure enough, the markets began to slip again this week as the reality started sinking in on Wall Street that no real progress is being made.

Nobody knows for sure how this will play out. But based on several years of recent history, I wouldn’t be surprised if the negotiations continue right down to the wire and the market has to tank first to lubricate the deal-making wheels.

Worse, I believe any deal we eventually get — after a brief relief rally — will ultimately disappoint investors and the ratings agencies!

In fact, I believe a grand bargain on taxes and spending is much-less-likely than some “can-kick” maneuver. The result is that we’re likely to find ourselves right back in the same soup we’re in now a few months down the road!

No doubt Washington will keep us in suspense right up until year-end. In the meantime, let’s look at two areas where some big developments are taking place.

Global Banking Tremors
Shake the Markets Again!

The global banking industry moved off the front page for a while. That’s because the focus shifted to all the money-printing and bond-buying that Federal Reserve Chairman Ben Bernanke and European Central Bank President Mario Draghi cooked up this summer and early fall.

But I always argued that the rallies those moves prompted wouldn’t last — because printing money does NOT solve the underlying problems:

* European banks and European countries owe too much money to too many creditors.

* They have neither the capital, nor the income, nor the tax bases to sustain those debts.

So once again, conditions are deteriorating, especially in Europe.

For one thing, the underlying economies on the Continent continue to deteriorate. Unemployment in Italy is headed to more than 11 percent in 2013, while it has already surged to a record 25 percent in Spain. French confidence is plunging, and conditions in “core” Germany are weakening.

For another thing, European banks didn’t use the free money and respite that the ECB provided them to rebuild their balance sheets and divest themselves of lousy sovereign bonds. The research my team and I have conducted instead shows they squandered their breathing room and dramatically INCREASED their exposure to bonds issued by troubled governments.

I will have much more on this front in the coming weeks. But I’m not optimistic about the global banking outlook. And it should surprise no one that the short-term pop in the euro currency — engendered by the THIRD Greek bailout in as many years — is already fading.

I see much more pain, and opportunity for properly positioned investors, coming down the pike — both in the global banking sector and right here in the United States in this key sector …

A Big Reason the Housing Recovery
Looks to Be Built on Shaky Ground

Now let’s talk about the second intriguing development out there. I’ve been saying for a while that I thought the housing market would gradually stabilize, thanks to a combination of low interest rates, lower home prices and the simple passage of time.

But I’ve also said I didn’t expect that recovery to be vigorous … and that it would be spread out over a period of YEARS, not months or quarters. That process is what we’re seeing play out in many markets.

But I’ve also been getting increasingly nervous about the risk we could backslide toward an “Echo Bubble” — one driven by a large influx of hot-money investors looking to compensate for rock-bottom yields in other income-generating vehicles.

Or in other words, the Fed might create yet ANOTHER artificial bubble — by driving too many people to buy single-family homes and condos with the sole hope of renting them out at higher yields than they can generate from Treasuries.

So, color me concerned by some of the data I’m seeing.

In this week’s S&P Case-Shiller release, I saw the former speculation hotbed of Phoenix notch a 20.4 percent year-over-year surge in prices! That looks like what we saw in 2005, not what you’d see in a normal, healthy market.

In another report from real estate research firm DataQuick, I noticed that absentee buyers (investors and vacation home owners, NOT more stable owner-occupants) are once again snapping up huge chunks of the homes on offer in Las Vegas.

They bought more than HALF the properties sold in October. Not only that, home-flipping activity is back to where it was in … wait for it … January 2005!

If these kinds of figures don’t have you worried, I don’t know what would!

We all know that investor-dominated housing markets are the most prone to collapse if conditions worsen because investors don’t have the same emotional attachment to their homes as traditional buyers.

I will have much more on this front in the coming weeks and months, too. So please do stay tuned — and please also stay safe! I expect much more market volatility as the new year looms!

Until next time,

Mike

About Mike Larson (http://blogs.moneyandmarkets.com/blog/interest-rate-roundup) Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company’s monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company’s daily e-letter, Money and Markets and editor of three of its premium trading services. Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald. Recognized as an interest rate and mortgage market expert, Mr. Larson’s views have been quoted in numerous publications nationwide, including the Washington Post, Chicago Tribune, Dow Jones Newswires, Associated Press, Reuters, CNNMoney.com, Sun-Sentinel, Tampa Tribune and the Palm Beach Post. His in-depth analysis of the housing and mortgage market and accurate forecast of the subprime crisis has lead to frequent appearances on CNBC, CNN, Fox Business News, and Bloomberg Television, as well as many nationally syndicated radio shows. Mr. Larson’s understanding of the U.S. real estate market has also been recognized overseas, having recently been featured in a documentary on the subject produced by a Barcelona-based television station. In addition, his writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association. Among the first analysts to call the housing slide, Mr. Larson’s policy paper, “How Federal Regulators, Lenders and Wall Street Created America’s Housing Crisis: Nine Proposals for a Long-Term Recovery,” received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. In the paper, Mr. Larson accurately predicted the long-term impact of the deepening subprime mortgage crisis on the broader economy that the nation faces today. Mr. Larson holds B.A. and B.S. degrees from Boston University.