Can the U.S. Sidestep Contagion with Europe?

Europe's financial crisis has moved beyond a regional crisis into a global one. And while financial theorist argue the problems can be easily contained, it's only fair to ask how and why. Can the U.S. (NYSEArca: DIA) avoid being sucked into Europe's black hole?

Sinking Income Levels

Even without Europe's problems, the U.S.' reputation for being the land of milk and honey has been declining. Household income, according to the Census Bureau's annual report on living standards, fell for the third consecutive year and on an inflation adjusted basis, incomes have retreated back to levels seen 15-years ago. Median household income was at a mere $49,445 in 2010.

Full-time workers also experienced sagging incomes, which are lower today than in 1978, after adjusting for inflation. Furthermore, the poverty rate for Americans increased to 15.1% of the population.

Will Europe's crisis help the U.S. economy end a multi-decade trend of falling incomes and rising poverty?

Still Blind to Recession

What do economists have to say about all of this?

As a collective group, economists still deny the existence of an economic recession and their off-the-mark financial projections show it. Instead of taking a sober and realistic view of the economy, they see growth, growth and more growth.

Economists with the National Association for Business Economics (NABE) predicted 2.8% expansion for the U.S. economy in May, but have since scaled back that forecast to 1.7%. For 2012, the group is projecting 2.3% growth.

The NABE has been likewise wrong about the unemployment rate. They were projecting a jobless rate of 8.7% for the remainder of 2011 and 8.2% for next year. Instead, nationwide unemployment has remained above 9% and if we account for marginally attached workers along with unemployed self-employed workers the actual national jobless rate is probably closer to 20%.

It's important to remember the NABE's survey was completed before the White House's unveiling of a $447 billion plan to stimulate job growth through (more) government spending and tax cuts. No doubt, once economists factor in the President's latest plan, they'll re-revise their economic forecasts bullishly upward to agree with their perennial growth bias.

Wall Street is Still Bullish

Over the past three months, European stocks have fallen 20% in value, what do Wall Street's titans have to say about all of this?

Laurence Fink, BlackRock's CEO, still favors large European stocks (NYSEArca: VGK), especially companies that have been beat up. In an investment conference speech, Fink added that Germany (NYSEArca: EWG) will have to play a 'major role' in rescuing Europe. He also remains confident that a solution for keeping the euro currency (NYSEArca: FXE) intact will be found. BlackRock ( BLK ) is manager for the iShares ETFs .

While Fink's opinions are not necessarily representative of the investment community's views, they aren't surprising. Is it reasonable to expect the CEO of one of the world's largest asset managers to ever be negative on stocks? These types of viewpoints are bad for business and in this regard, Fink is no fool. Contrary to what the angry documentaries say, Wall Street's primary business is not lying or cheating but dreaming.

In the meantime, maybe Fink is right about European stocks being cheap. And there's the possibility stock prices will get even cheaper, which will probably leave Fink's opinion unchanged. Readers will have to determine for themselves whether they agree with Fink's biases.

The Multi-Trillion Dollar Question

Can the U.S. markets (NYSEArca: VTI) escape the wrath of Europe? It's vital to remember that sovereign debt defaults have large implications beyond the borders of the defaulting countries. The fact is the entire global financial system is an intertwined beast, which means avoiding infection won't be easy.

Thelatest ETFguide's ETF Profit Strategy Newsletter and its ETF Picks outlines comparisons between 2008 and today along with actionable investment strategies using ETFs.

Those who think the U.S. will be unaffected by Europe's crisis are at best engaging in wishful thinking and at worst intentionally misleading the public.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos