A Problem Seven Times Bigger Than Greece

There is no doubt the U.S. stock market is being affected by the uncertainty in the eurozone. S&P 500 companies have heavy exposure to the European markets.

While there is plenty of proof of the eurozone’s influence on our stock market, I want to update my readers on the tragedies in Spain.

Despite Greece being the center of attention, I reported on Spain recently as being the biggest problem in the eurozone at the moment. I detailed the fact that Spain is experiencing a real estate crash. As such, most mortgage-backed securities funds are losing significant amounts of money as housing prices collapse.

The collapsing real estate market has placed severe pressure on Spanish banks, which have requested that the Spanish government step in and bail them out.

The problem is that the Spanish government is part of the eurozone and, as such, cannot print money at will to provide the liquidity to the Spanish banks.

The bond market sees what is happening and so has pushed interest rates much higher on Spanish bonds, further hurting the eurozone country.

In a meeting of eurozone officials this week, the prime minister of Spain asked the eurozone for help, because the country cannot continue much longer paying such high interest rates.

The only way the eurozone can help push interest rates down is by buying Spanish bonds. At this stage, it is something that the eurozone is not contemplating, which will leave Spain vulnerable to higher rates.

But this is not the worst part. Spain has what can be referred to as 17 independent states. When I talked about Spain, I mentioned the mortgage-backed securities and the real estate crash.

Officially, Spain’s 17 states had debt of eight billion euros. However, it was just uncovered this week that the 17 states were hiding more debt on their books than the market was aware of.

Instead of eight billion euros of debt, the states have 36 billion euros of debt!

This will cause interest rates in Spain to rise even further, as the debt situation—outside of mortgage-backed securities—now becomes an issue as well.

Forget Greece’s problem; the issue with Spain could come to the forefront. Measured by GDP, Spain is a much bigger economy than Greece in the eurozone and so would require huge amounts of money to help it. Spain’s economy is seven times bigger than Greece’s economy! (See: If You Thought Greece Was in Trouble.)

I wrote in the very first week of this year that 2012 would be a devastating year for the eurozone. Unfortunately, my prediction came true. And unfortunately again, I only see the problems in the eurozone deepening.

Where the Market Stands: Where it’s Headed:

Is it all over? Will the Dow Jones Industrial Average ever see the 13,000 level again?

Since March, I have been writing that the stock market has been putting in a huge top in and around the 13,000 level. In technical analysis terms, the right shoulder of classical head-and-shoulder pattern is almost complete.

While I can’t yet count out the bear market rally in stocks that started in March of 2009, its life cycle is near the end. Get ready for stock market oxygen in the form of the long-forgotten, not-much-talked-about QE3.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation, as I’ve written about them (many times) before. Let’s just put it this way: deflation is about the worse economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in PROFIT CONFIDENTIAL, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.