So the cavalry isn’t arriving immediately for Spain — and with interest rates still around 6% on its 10-year bonds even after this ruling caused dip of about 0.4 percentage points, every day counts. Consider that the U.S. borrows for 1.7% right now on its 10-year Treasuries.
And then there’s the bigger issue that long-term financial stability will never come from providing a debt backstop now. The economies in the eurozone need to improve to raise tax receipts, and governments need to be realistic about their spending habits.
Q: So … this move helps ensure Spain and Italy and whatever won’t go bankrupt. But things still suck over there.
A: Right. The bottom line is that the debt problem also is an economic growth problem because you need businesses and consumers generating tax revenue, or else this is all academic. The ECB also has been trying to kick-start the economy, with Draghi cutting interest rates three times since taking over less than a year ago, to a current record-low level of 0.75%.
But recession is here — and permabears like Dr. Doom Nouriel Roubini think it will get worsen into depression, considering some regions like Greece have staggering unemployment rates of 20%.
And the worst part is that Germany is pretty pissed about this whole thing because its primary concern is the ECB mandate to control prices. Unlike the U.S. Federal Reserve with a dual mandate to control inflation and maximize employment, it’s technically not the job of the European Central Bank to care about employment.
In short, it’s a mess because of high unemployment and governments spending more than they can afford.
Q: Man, that sounds a lot like America.
A: Yup. Except the irony is that right now we borrow for a ridiculously low rate because the world sees us as “safe.” Compared to alternatives like Europe or Australia or China, I guess we are. So our debt is not an immediate problem.
Just watch out if perceptions change, however, since it will wind up costing us — not just in interest on our debt, but in many other ways relating to trade and our economy.
Don’t worry, we won’t wind up like Zimbabwe. But there will be consequences.
Q: Crap. I thought this meant I could start buying stocks again …
A: Don’t be a moron — you certainly should be buying stocks if you’re a long-term investor. Because the bottom line is that with this backstop, Europe now has a much, much lower chance of falling apart. And if you wait for the fireworks and streamers, the recovery there will pass you by.
Besides, have you failed to notice that S&P is up 13% since Jan. 1? That we are challenging levels not seen since spring 2008 when unemployment was like, 5%?
Yes, Europe has a long way to go, and other global markets like China are seeing headwinds. Yes, America has not wholly gotten its swagger back. But unless you have a flux capacitor, you’ll never be able to perfectly sell a top and buy a bottom. So give it up.
Most long-term investors know to buy dips as well as tops — it’s called dollar cost averaging. Here’s the damn Wikipedia page for it if you’ve never heard the term.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.