How bad are financial conditions in Europe? So bad, that European stocks (NYSE: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 (NYSE: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%.
Likewise, 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 (NYSE: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 decelerating.
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 economies.
The eurozone (NYSE: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 (NYSE:RWR), stocks (NYSE:TMW), bonds (NYSE:AGG) and commodities (NYSE: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.