After Greece's somewhat positive election outcomes, the reality
remains that the great eurozone monetary experiment is still in
deep trouble. Spanish bond yields soaring to new euro-era highs
above 7.25% is proof of that.
Regardless of Greece staying within the fold for another few
months are bigger issues of politics, solvency, growth and
integration that will determine the fate--indeed the survival--of
the single currency regime.
And it should also be clear now to all that the troika is not
rushing to the rescue with any grand plans that will make any
difference in the next few weeks, or even months. Yes, they are
drafting specific blueprints for greater eurozone integration that
will likely be unveiled around the time of the next EU Summit June
28-29, including banking and fiscal union that will shield against
But many of those structural reforms depend on EU treaty and
other legal amendments that will take time. German Chancellor
Merkel and Finance Minister Schaueble have been telegraphing
as much for weeks. They see the path of full integration taking two
to five years on the low end.
And this works fine for Germany because they can get a lot of
things sorted out during that time; things like who stays and who
leaves, and who can get their fiscal house in order and who
can't. In this way, they ensure fiscal discipline before they dare
step down the slippery slope of "debt sharing" (i.e., eurobonds,
quantitative easing, and all other forms of monetizing debt and
Last fall, I was convinced that Europe would get the Fed's
religion of QE if only because they saw how bad the US credit
crisis hit our economy and markets in 2008 and 2009. But as I
learned more and more about their philosophical and economic views
and witnessed their stubborn resolve, I realized that they will let
member countries go to the brink of disaster before they give in on
the ECB becoming the lender of last resort.
Given this, can you imagine that US markets once again
slowly adjust to the snail's pace of eurozone "action" as
participants realize this crisis is going to be with us for another
And how likely is it that the S&P lows of 1,266 hold in the
face of the euro-mess, China deceleration, and our approaching
These are various ways of asking "can we decouple?"
Obviously, to answer this line of questioning, you will probably
also consider things like the extent of Europe's debt and banking
crisis and its impact on their recession.
In this morning's "Profit from the Pros" letter, Reity put
together a decent scenario matrix with some probabilities and
outcomes that get you thinking. He doesn't believe US stocks
are pricing-in all the odds of something going wrong in the
For those who haven't seen it, I share it below because
framing our investing and trading questions this way gives you a
good framework for making decisions that suit you,
ahead of time
. In other words, before you are caught off-guard and thinking
emotionally. You don't have to get the probabilities right, you
just have to know what you will do under different
"So even though I think the European debt situation will be
contained in time, there is still a 10-15% chance that their
politicians botch it up leading to a Lehman type implosion.
"Even with no implosion, there is about another 20% chance that
the European economy slips into such a steep recession that they
export their troubles to other economies around the world.
Adding it all up there is a 65-70% chance of things being fine
with US stocks free to make normal annual gains. And then there
is a 30-35% chance of stocks being decimated over the next
And you see how I got through this whole thing so far
without even discussing new Federal Reserve QE? It will be
interesting to see if we can talk about these problems
and disregard the "nearly out of meaningful bullets" Fed.
Unless of course you think markets are waiting for a short-term
stimulus driven rally soon.
SPDR-DJ IND AVG (DIA): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-BR 20+ (TLT): ETF Research Reports
PWRSH-DB US$ BU (UUP): ETF Research Reports
(VIX): ETF Research Reports
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