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