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Mark's Market Blog

8-2-11: Europe starts to go.

By Mark Lawrence

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Last night the house passed the debt ceiling bill; this morning the senate passed it too, and Obama signed it. So everything's better now, right? Nope. Europe is imploding right now.


S&P 500 February 7 2011 to August 2, 2011

Today Spain and Italian 10 years bonds hit or exceeded 6%. This is the level where interest rates start to runaway uncontrolled. At 7% the EU will want to do a bailout. They'll be at 7% sometime this month, certainly. It's noteworthy that I expected to post this in mid to late August, and it's August 2nd. Things are developing far faster than I imagined.

There is $300B available in Europe for bailouts. Spain will need all of that. Italy will require another $600B minimum. This money would have to come mostly from France and Germany, but there is absolutely no political backing in Germany for further bailouts. Absent a bailout, French banks are at risk and the EU could come crashing down. I don't see any realistic way for this new European crisis to be handled in the coming few months - there is no overlap between the viable economic solutions, which call for about a trillion dollars in new bailout funds, and the viable political solutions, which don't really allow Germany to participate in any meaningful bailout. This is a bit of an echo of the US debt ceiling debate, with Germany taking on the role of the Tea Party: they prefer to bring it all down rather than pay out any more money.

In the US, the S&P, Dow, Nasdaq, and Russell 2000 are all now trading below their 200 day moving average. Crossing the 200 day average is a relatively rare event. Most other world markets have been trading below their 200 day average for a couple of weeks. There's a strong tendency for such a crossing to establish a new direction for the markets.

The ECRI has been forecasting a US / European recession for a couple of months. These guys have a very decent track record. Consumer confidence in Europe and the US has been tanking for a month or so, and consumer spending has dried up for a couple of weeks.

It would be very unsurprising if the US stock markets dropped 30% or more in the next two to four months. It would be unsurprising if there were another banking crisis, this time brought on by Europe. It would be unsurprising if such financial problems led to even more layoffs in China, followed perhaps by civil unrest.

What I'm saying here is we're at a moment that looks a lot like the month or two leading up to Lehman's bankruptcy and the crash of 2008. Europe, with their fake bailouts, China, with their ridiculous public works, and the US with QE1 and QE2 have been kicking the can down the road for a couple of years now. I think we just hit the end of the pavement. Hang onto your butts, we may be going for Mr.Toad's Wild Ride.

Again, I recommend you have a couple thousand dollars in $20 bills in your house, and I recommend you be extremely cautious in your investing. Cash or Treasury bills are a better idea than most others.

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