Thu 3/29/12 4:17 PM – Europe Back in the (Bad) News

Well, just when you thought it was safe to go into the water . . . I believe that referred to the sequel to the movie Jaws. The original movie was released 37 years ago. We were just married and watched it just before heading to the beach. My wife never left the shore.

Last month Greece got their debt deal done and received more bailout money from its reluctantly generous European neighbors. The new lending scheme of the European Central Bank loaning trillions to European banks, whereupon they invested the proceeds in government bonds and pocketed the spread was seen as solving the liquidity problem in Europe. All seemed well. Da da da da da da . . . cue the trumpet.

Now, Europe is back in the news. Italian and Spanish bond yields are starting to rise again and Portuguese bonds still yield 12%, ridiculously high for a European government, unless the ability of the country to pay it back is in serious question, which it is.

Tomorrow, Spain releases its new budget. Spain has already boldly informed European leaders that it does not plan on meeting the austerity plan they demanded. At the same time, the new Spanish government lost its majority in parliament, due to just completed elections. Meanwhile, unemployment in Spain is 23%. That rate is higher than Greece and rising while youth unemployment is over 50%. Yesterday there was a general strike protesting any further austerity measures. Also in the news is the fragile state of the Spanish banking system.

Italy has been making progress on reform but it has an awful lot of debt too and its government bonds yields are going up again.

I have written repeatedly that this European debt crisis will last years. It is a bear to get out from under massive debt, especially when economies are slowing, exacerbated by government layoffs and tax increases. I hope the U.S. is paying attention because we are on exactly the same road. We are just a few years behind but after a pretty good push down that road from Bush 43 President Obama has put the debt car into overdrive.

At the same time, China is slowing more rapidly than expected and its stock market is down sharply the last month. Brazil and India are also slowing down and their stock markets have started down as well.

Will the U.S. be the only good major stock market in the world this year beside Japan? I doubt it. I think it is likely that we will see something similar to the early rise and midyear fall of 2011, when the market topped out in late spring and slid until October. “Sell in May and go away,” the old Wall St. adage, may end up being “sell in April and go away.” We’ll see. In the meantime, I am cautious.