Europe’s Sovereign Debt Means Zero
Growth for the Next Few Years

sovereign debtJust when the U.S. economy and the housing market are turning up, Europe’s sovereign debt bomb critically injures global capital markets. That’s my biggest fear going forward and it’s a very real possibility. The U.S. stock market would be quite a bit higher if there was more certainty in the eurozone.

Something has to give with Greece. Even with substantial austerity measures, that country’s finances are unsustainable. The bond market is priced for absolute safety right now and, in a sense, it’s expecting the worse. The stock market is in correction and the only thing holding it up is its reasonable valuation. And it’s not as if Greece declaring bankruptcy is that much of a shock, it’s the risk to the euro currency that’s the problem.

So, the domestic stock market continues to be held hostage by sovereign debt problems in the eurozone. Of course, the U.S. also has a sovereign debt problem, but it’s fixable as long as there’s the will to do so. Regardless, if you’re a country with sovereign debt that’s greater than your gross domestic product (GDP), it’s a big problem. It’s like cascading credit card debt; paying off the monthly balance with another credit card. It’s a very difficult cycle to get out of.

Right now, a lot of the economic news from Europe is showing virtually no economic growth. Recession or zero growth is now in the eurozone. While I view the U.S. economy to be in a continued recovery, Europe’s sovereign debt problems are likely to be the catalyst for the next U.S. recession. I still am worried about geopolitical risks associated with Iran and Syria, in regards to their potential impact on capital markets. Right now, the U.S. stock market is okay, holding its own with fair valuations and a decent corporate outlook. See Stock Market Correction: Why it’s Limited. But if eurozone policymakers don’t come up with an orderly plan for Greece’s future, then our pocketbooks are going to be in further trouble.

What the stock market is looking for now is more certainty on Greece’s future. Unfortunately, stock market investors don’t really care about fixing the sovereign debt problem in the eurozone. They just want things sugarcoated so they can get through the next quarter. This is why this problem is likely to be prolonged and investment risk in the stock market will remain high.

Usually, by the time we get into second-quarter earnings season, companies are able to predict how their businesses will fare for the rest of the year. I think S&P 500 companies will once again beat consensus this earnings season. Forecasts for the bottom half of the year will be absolutely critical to the stock market. All I want from the eurozone is a strategy for Greece, even if this means a withdrawal from the euro in an orderly fashion. The worst possible outcome is for non-orderly political uncertainty in that small country. It’s kind of odd; global capital markets are now held hostage by a little country with small GDP and big sovereign debt. I suppose this is the beginning of the end of globalization—at least politically.