Since last we discussed the European crisis, the Chinese have announced that exports to Europe slowed in October and the EU Commission* lowered their 2012 economic growth estimate for the euro-region from 1.8% to a meager 0.5%. Further, there's evidence that overseas bond markets are betting on full-blown contagion, driving yields on 2-year French debt from 2.75% to 3.31% in just one month.
My Breakout partner Matt Nesto and I sat to discuss the situation in Europe and the implications for the rest of the world this morning. Nesto says he's growth weary, if not flat out cynical, regarding the inevitable contagion of the debt crisis. He thinks putting a halt to the panic is less than half the battle for the EU, ECB, IMF et al. "The harder problem to fix is going to be a recessionary economy which is going to be worsened by mandatory austerity," he says.
Nesto is waiting to be told something he doesn't already know. He didn't believe in last month's rally off the announcement of a now-forgotten Eurozone plan and he wasn't panicking yesterday. "I'm no more bearish today than I was a month ago," he shrugs.
I'm more "energized" by the volatility, but I ultimately come to the same conclusion. Europe's real problem is one of economic confidence and the looming recession. Markets move fast, but economies don't. Companies cut jobs, close factories, and generally roll up their sleeves during troubled times. As we're learning in the States, rehiring folks and starting the plants back up is a much slower process.
There's an infinite number of ways the complete lack of direction in Europe can, will, and should impact the global economy. All of these implications are worse than even a bad plan. Put it this way, anyone walking into a casino knows the odds are rigged in favor of the house. Regardless, people still gamble because the odds are fixed.
The rules governing the game of doing business with EU nations change with every fluctuation in the Euro and every new country afflicted with contagion. If Italy can get infected, and it has, all bets are off for the entire continent.
The global economy can deal with a shallow European recession. What's unfolding now could be something different and much worse. European industry is going into a full-blown seizure and the leadership is running out of both ideas and time. This isn't a bullish or bearish market call.
All of that said, here's the bottom line: Europe is swirling towards an economic black hole but not yet near an event horizon point of no return. I'm still bullish because the sky always looks to be falling, yet somehow remains aloft after all these years. From where I'm sitting the odds still favor Europe getting it's act together in some deeply flawed yet coordinated way.
I continue to buy dips and sell rips. I see support at 1,220 on the S&P500. I'm buying any time we get within 10 points of that level and selling into strength. NOT advice and not hope, just a trading strategy in a weird, dangerous market.
* NOT the European Central Bank (ECB) as I mistakenly refer to it in the clip