The Dow Jones Industrial Average ended today at 12,700. The 15-51 strength Indicator closed at 51,260. It gained 1.04% today, outpacing the Dow by ten times, which ended the day down a mere .1%.
Lack of actual news has slowed stock market volatility. Investors and traders look almost paralyzed, wishing “the market” up five straight sessions, but with little show of confidence. Everybody’s waiting for fourth quarter numbers, or waiting for all hell to break loose in Europe. “The market” looks scared. Really scared. So today I set out to answer the question: Exactly how bad is the situation across the pond?
You won’t like what I found. But before I say – Are you sitting down?
Are you sure you’re sitting down with no risk of injury? You’re sure.
Okay.
As I mentioned in LOSE YOUR BROKER NOT YOUR MONEY, the next piece of bad information to hit “the market” would cause it to swiftly correct and sell off with dramatic fashion. I pointed to inflation, the cost of money, as the major cause for concern. Inflation will raise interest rates and tighten money even further. This will slow market activity significantly – which will cause the stock market to correct – which will further pressure banks – and homeowners hanging on by the skin of their teeth. That’s bad enough. But what’s even worse is that inflation will raise the cost of government debt. And sadly, that’s the picture in today’s story.
If you have been reading my blogs you know that the United States of America is 100% leveraged – $15 trillion of national debt against a $15 trillion dollar market economy. Consider a healthy state to be a 65% debt-to-GDP ratio. In other words, 100% leverage is about 35% points too much in debt.
In fact, 108% leverage caused the Italian government to collapse – in other words, $1.08 of debt for every $1.00 of market activity caused its government to fail. Think about that for a moment. The Italian government crumbled under a debt load just 8% points higher than the current U.S. level. That’s pretty scary – but heads up!
Consider that Greece, the major thorn in Europe’s side, is 174% leveraged, Spain is 154%, France is 182%, and Germany, Europe’s largest market, has 142% in national debt. Ireland has an eye-popping 1,165% in national debt – OMG! And these are not to mention all the other countries in major trouble, the Netherlands (344%), Portugal (217%), Sweden (187%), and Finland (155%), to name a few.
These levels are way too high! But wait…Are you still sitting?
Are you sure you still have no risk for injury? Okay. Know that America’s greatest ally, the United Kingdom of Great Britain, is 400% leveraged – and China has just 5%.
This is not good. Inflation will drive the cost of borrowing through the roof and China will be there to solely gain – because they have money in hand and plenty of room to leverage (print) more.
There is only one way to win such a battle.
America, and in fact the world, needs growth more than it needs anything else right now. Government budgets can no longer be cut fast enough; fiscal restraints are no longer the silver bullet. Real growth must accompany them. And it must be brisk – with .45 caliber force.
Otherwise this stock market will sell-off faster than a pig into a mud hole. Count on that — and don’t’ get sucked into the fluff. Market conditions remain extremely negative, and the stock market is full of speculation.
Stay tuned…