Is the vacation almost over for Europe?

Founder and Publisher of the Switzer Report
Print This Post A A A

Wall Street has put together five positive days in a row with the Dow Jones up by around 4.7% and the S&P 500 index up more than 5%. But what happens next?

Well, in a perfect world the Europeans will come up with a credible plan to shore up confidence in their banks. Sure, the core problem is the fiscal precariousness of the PIIGS – Portugal, Ireland, Italy, Greece and Spain. But the real stock market concern now is: what happens to the banks that have bankrolled these pork-barrelling nations?

The US Treasury Secretary, Timothy Geithner, got it right when he recently told the European Union’s finance ministers that they needed to “send a strong message to the market” to show they were serious about backing both Europe’s governments and banks.

When the GFC was threatening to fling the world into a full-blown depression, the Yanks came up with TALF – the Term Asset-Backed Securities Loan Facility – which provided economic incentives for consumers and small business. They also had TARP – the Troubled Asset Relief Program – that gave money to the banks to give credibility to their balance sheets in order to generate lending as well as confidence.

Richard Bove, an analyst at US brokerage Rochdale Securities, says Europe needs a TARP program and I think he is spot on. Europe’s banks need to be trusted.

What worries me is that too many European finance ministers thought it smart to reject Geithner’s suggestion based on the idea that the US caused all this mess in the first place. That is dumb.

The US is certainly well down the track of repairing its damaged financial system and it has been the Europe’s lack of action that has KO’d stock markets for most of the past two years. Their procrastination and lack of unity is breeding investor negativity and we need to see a positive circuit-breaker.

The International Monetary Fund (IMF) meets in Washington this week and the BRIC nations – Brazil, Russia, India and China – are meeting to see what they can do to bolster Europe. Why? They need their customers alive and buying!

Meanwhile, we’re expecting the US Federal Reserve to make a critically important announcement on something called ‘Operation Twist’, which will see the central bank twist out of shorter-dated bonds and into longer-term bonds. This should keep US long-term interest rates low for some time.

There are no major US economic data expected this week and so the market’s focus will be on politics, and President Obama’s plan for funding his jobs plan should also grab a lot of attention.

In a somewhat positive sign, the Spanish economics minister, Elena Salgado, said at the EU finance ministers’ meeting at the weekend: “We reached the conclusion that we need to make our financial system more robust. There is a consensus that it would be good for our financial institutions to strengthen their capital to comply with Basel III requirements and to face any eventuality of the moment.”

It sounds like a bit of reality is creeping into the la-la-land that is Europe nowadays.

So what does all this mean for growth? This is my view on the rest of the year in an imperfect world:

  • Europe comes up with a more credible plan for salvaging its sovereign debt mess over the next few months, protected by the central bank agreement to provide it with liquidity.
  • The US economy gradually proves that it will not go into recession.
  • The stock market rallies into Christmas.

History says that in the last two years of a presidency, the stock market ends up in positive territory. But these are historically significant times and so the outcomes could defy expectations.

History also says a president can’t get re-elected with an unemployment rate of more than 7.5% and so the current US administration must get some improvement on the jobs front or else the Democrats, and the US economy for that matter, are DEAD!

I’m putting my money on some better political outcomes to deliver some overdue better market results.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in today’s Switzer Super Report

Also from this edition