European debt crisis threatens U.S. equity markets

Stock index, chart, technical analysis

The fear machine is rolling again. “Is The World’s Biggest Economy in Danger of Disintegrating?” It’s a CNBC story about the unraveling of the European Union 55 years after it was founded as the E.U. finds itself at odds with its member states.

Politicians put their own national interest first and blame whatever they can on the euro currency. In France, all of the candidates for the next presidential election have their own ideas and agendas for patriotism and protectionism. The Germans were not cooperative when it came to cutting Greece any slack. Even George Soros is down on the future of the EU for The Continent.

“Unless extraordinary steps were taken to save it from the consequences of the debt crisis, after injecting more liquidity into the system, the E.U. was unlikely to exist,” he said. “Latin American countries suffered a lost decade after 1982 and Japan has stagnated a quarter century, both survived but the E.U. is not a country and not likely to survive.”

(We should probably remind Mr. Soros the Latin America is not a country either.)

There’s no doubt the European model is flawed. We saw just how flawed it is when they tried to solve the Greek puzzle. Geithner and Bernanke tried to get the EU to work the way the Fed does. It’s true; there is no Constitution for Europe like the United States of America. When they decide to do something here, they get the heads of the big banks together and beat ‘em up over the head. Then they just do what they are going to do. The difference between the U.S. and Europe is that states' rights concern all kinds of social and political issues but when it comes to national finance, we speak with one voice. Europe does not. Here there is none of this rule by committee back and forth nonsense that takes weeks if not months.

But the Europeans have one thing going for them: history. It was their continent that was destroyed not once, but twice in the 20th century. The Europeans have a unique scar that we don’t understand but will impact their continent similarly to the way the American Revolution and Civil War has affected ours. We ought to think more carefully about how these events have impacted our history before we comment on theirs. Europe is going to do everything in their power to be sure their continent won’t ever be wrecked by another World War.

If the EU can’t work, it really won’t work. I think the current generation of critics sells the politicians and people far too short. I won’t say they’ll never give up on the EU but it would take the mother of all catastrophes to blow it apart. What happened to Europe in the 40’s is like 9/11 times a thousand, at least. Its over 70 years and we still look on Pearl Harbor with reverence. So imagine how they think about The Blitz. 

We don’t normally talk about this sort of thing here but it’s timely since the next correction is already here and part of the blame is going towards the events in Spain.

With that, Spain sold 2.6 billion euros of long term debt with a yield of 5.338%, on the low end of their projections at a price higher than projected which is wiping up the fear machine again of the next phase of the European debt crisis.

The problem is real, the EU is a set of loosely affiliated nations, all with problems of their own that are forced to dig into the till and help their fellow neighbor. The problem is not just Spain but what comes after Spain. What I’d like to know is how all of this is timed and why didn’t Spanish debt become an issue while the Greek sequence was materializing? I don’t think we are going to get an answer to that. But I tend to think the European debt crisis is an engineered event by the most powerful bankers in Europe, one PIG at a time. No doubt, each of the PIIGS is damaged if not broken but don’t you find it interesting how the flow of these events materializes?

What I think is going to happen is what I told you last year, we’ll have one crisis at a time until all have been dealt with. As long as 2 countries don’t fall apart at the same time they’ll be able to keep their Union together. I’m serious about this. It amazes me how we do end up getting one crisis at a time. But bears will buy into it and look for the next quick buck and many will not cover when they should. Its only another couple of weeks before the May issue comes out where I present the rest of my case for a very long term equity bottom.

Tough week for the markets as the grinding correction continued. The VIX finally got above 20 but on Thursday they got a little too happy and Friday’s result was predictable. I’ve told you for the past year that bears fuel bull moves and bull’s fuel bear moves. It’s the up days that allow this correction to continue. The story of this market is the psychology. We could get rid of this correction IF the fear levels build quickly. They are on the bad days but the good days are too good. See the black candle on the VIX daily. That’s the day they told us the market had its best 2 day sequence since MARCH!! C’mon now, it’s only the 2nd week of April. That’s too much excitement. IF we wouldn’t get the excitement on the good days, just for discussion let’s say Thursday’s reading was flat. Wednesday closes at 20 and Friday’s range was 1.77. Add that to 20 and we are already at 21.77.

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