How bad are financial conditions in Europe? So bad, that
European stocks (NYSEARCA:VGK) just touched 18-month highs.
And why are they doing that? It's because of "optimism U.S.
lawmakers will agree on a new budget and avoid the so-called fiscal
cliff" - that's according to one very trusted media source, with
lots of high priced terminals installed you know where.
The other extreme is the Dec. 6 edition of the Wall Street
Journal (see below), whose front cover made no mention of S&P's
latest Greece downgrade anywhere. Have they run out of words to
describe the Greek situation? Or have reporters been bitten with
crisis fatigue? Instead of where the Greece news should've ran, the
headline "U.S. Gas Exports Clear Hurdle" appeared.
S&P (finally) downgraded Greece to BB+ and no that ugly
credit score doesn't qualify as "investment grade." But even here,
there's a silver lining. Greece's rating - according to S&P's
alphabet soup chart - is nevertheless the highest tier of junk.
(Does S&P have F- ratings or is that too real world?)
Here's a quick recap of three reasons why Europe's financial
crisis (NYSEARCA:FXE) is getting worse:
Economic forecasters have ratcheted down Europe's growth prospects
so many times, the velocity of the crisis has made their numbers
and assumptions look stupid. After saying the eurozone's 2012
economic activity would contract by just 0.40% in September, the
ECB now says the magic number is 0.50%. Likewsie, for 2013, the
ECB's original forecasts were too rosy. Instead of 0.50% growth,
they now expect just 0.30%. If recent history is any guide, expect
more downward revisions.
What's occurring? The problems of over-indebted eurozone nations
(NYSEARCA:FEZ) have spread to the healthy regions. Instead of the
strong countries helping the weaker ones, as theorists argued would
occur, the weak are making the strong weaker. And as a result,
economic output throughout the entire eurozone region is
Over the past two months, the unemployment rate in Greece (26%),
Spain (26.2%), and Italy (11.1%) has hit record highs. There is no
silver lining here. A lack of income means less commerce and less
flow of capital. Without jobs, the goal of prosperity inevitably
leads to poverty. Unhealthy labor markets always equal unhealthy
The eurozone (NYSEARCA:FEU) is supposed to be a union of member
countries with the same economic goals and financial interests. But
the stark differences between the economic haves vs. the have nots
shows a total lack of integration.
Compare and contrast borrowing rates.
Germany pays 1.29% on its 10-year debt, France pays 1.98% on its
10-year debt, while Greece pays 14.37%, Portugal pays 7.35%, and
Spain pays 5.44%. In a true union, everyone pays the same borrowing
rate and not one basis point more.
The last time we saw economic conditions this bad in Europe was
during the Great Depression. It was in fact a deflationary
depression. In other words, prices across the board declined: real
estate (NYSEArca: RWR), stocks (NYSEArca: TMW), bonds (NYSEArca:
AGG) and commodities (NYSEArca: DBC).
If this seems far-fetched, consider that the first leg down from
the 2007 highs was stronger than the first leg in 1929. The
2009-present counter trend rally was also stronger than the
1929-30. If the parallels persist, the next leg down should be more
than a mere flesh wound.
Remember: The Great Depression erased 29 years worth of growth.
Interesting enough, if today's market erases 29 years worth of
growth, valuations (P/E ratios and dividend yields) would approach
levels seen in the early 1930s.
Based on a detailed analysis of valuations, sentiment readings,
technical indicators, parallels between the Great Depression and
today along with common sense, the
ETF Profit Strategy Newsletter
outlines what to buy, what to sell, and when to do it. The
brand-new December issue includes a detailed short, mid and
long-term forecast for the U.S. stock market along with
corresponding profit strategies.
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