| Living in Florida I've been in the eye of several | | | | As a proxy for European stock markets, the |
| hurricanes. In the eye, one side of the storm has | | | | VanGuard European etf (VGK) is down 16% from |
| passed and there is great relief. There's some | | | | its top last November. |
| rubble and signs of destruction, but the sun is | | | | Look south and the stock market of Brazil is |
| shining. We begin to pick up the pieces. There's a | | | | down 12.4%, the iShares Latin America etf (ILF) |
| hopeful feeling the danger has passed. Then you | | | | down 14%. |
| listen to the weather forecasters and learn it's | | | | The storm clouds are worldwide. |
| just a temporary respite. You're in the eye of the | | | | Record debt levels taken on by consumers in the |
| storm. The other side of it is about to arrive, | | | | bubble times were passed on to banking systems |
| sometimes with more fury than the first side. | | | | when the bubbles burst and households defaulted |
| Unfortunately, economic radar is not as advanced | | | | on their mortgages and loans. With the resulting |
| as weather radar. | | | | near-collapse of financial systems globally, the |
| However, we can look at conditions off in the | | | | banks passed the debt load on to the balance |
| distance and surmise whether what was just | | | | sheets of governments as part of the |
| experienced was an isolated financial cold front | | | | government rescue efforts. |
| passing through, or ongoing problems that have us | | | | So it's governments that now sit with the record |
| in the eye of a storm. | | | | high debt levels and record annual budget deficits. |
| In January, global stock markets declined in a 10% | | | | Experts say governments have only three |
| correction on concerns about a potential | | | | choices. |
| government debt crisis in Greece, and initial | | | | Smaller countries could default on their debts, |
| moves by China to slow its economy. But the | | | | essentially declaring bankruptcy, stiffing the |
| clouds blew over and most stock markets | | | | investors in their bonds, and like all bankrupts |
| recovered. | | | | trying to start over with crippled access to credit |
| Three weeks ago the storm re-gathered, and | | | | markets. Large developed countries, particularly |
| global markets began to decline again. The debt | | | | the U.S., could not consider that route. But as we |
| crisis in Greece turned out to be real, and this | | | | have seen recently, just the potential for a |
| time there were also fears it would spread to | | | | default by even a small country creates panic in |
| other European countries. There were also more | | | | markets. Given the entanglement of international |
| fiscal moves by China to slow its economy. | | | | debts and loans, one or two small countries |
| The market's decline worsened with a 1000 point | | | | actually defaulting could well create another |
| intraday mini-crash (and quick partial recovery) a | | | | financial melt-down similar to what followed the |
| week ago Thursday, and another triple-digit | | | | bankruptcy of Lehman Brothers. |
| decline the next day. | | | | That leaves two other choices. |
| Fears of a real crash then circled the globe, | | | | Governments can pass the responsibility for |
| pushing European leaders into panicked secret | | | | paying down the debt back to consumers, where |
| meetings over the weekend. The surprise | | | | it started, through higher taxes and lessened |
| announcement that came out of those meetings | | | | services. That's the austerity approach demanded |
| last Sunday night, of a massive $trillion rescue plan | | | | by the EU/IMF as conditions for their big European |
| for troubled European countries brought instant | | | | rescue package announced last weekend. We can |
| relief. | | | | already see from the protest marches and |
| The sun came out on Monday, with most global | | | | strikes that will be a difficult plan to implement. An |
| markets soaring. But there was no follow-through. | | | | austerity approach also means less consumer, |
| The market was down three of the last four | | | | business, and government spending, resulting in a |
| days. | | | | slowing economies. |
| The eye of the storm? | | | | The third choice would be to try to inflate the |
| Look to the east, and we see Asian markets | | | | way out, by allowing inflation to rise so |
| tanking, not having responded nearly as | | | | governments could pay down debts faster (with |
| enthusiastically to the announcement from Europe. | | | | inflation-devalued currencies). That has worked |
| The Chinese stock market is at an 11-month low, | | | | sometimes in the past. Unfortunately, markets |
| down 24% since its peak last July. Hong Kong is | | | | don't like rising inflation. So they were not good |
| down 15% from its peak of last November. | | | | times for investors. |
| Look in the opposite direction, to Europe, and the | | | | Meanwhile, although other global markets have |
| government debt crisis in Greece is spreading to | | | | reacted quite negatively to the situation, the U.S. |
| Portugal and Spain. After protest marches and | | | | market hit a new bull market high just three |
| strikes in Greece last week, Spain's largest labor | | | | weeks ago, and although more volatile since, is |
| union is calling for Spain's public workers to strike, | | | | down only 6% from that high. |
| in protest of the austerity measures, pay and | | | | Was the big rally on Monday an all-clear signal as |
| pension cuts, required by the IU/IMF rescue plan. | | | | some believe, justifying the complacency? Or is |
| Meanwhile, European stock markets rallied only | | | | the lack of follow-through since an indication that |
| briefly in response to the rescue plan | | | | we're in the eye of a storm? |
| announcement, skeptical that it will be successful. | | | | |