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European Debt Crisis: Can U.S. Investors Afford to Ignore it?


If there is one thing to keep in mind about the 2008 financial crisis it is the number of ''experts'' that emerged after the fact to point out all the telltale indicators that we willfully ignored. While Europe's version of financial meltdown is still unfolding, it's not a stretch to suggest that the global markets view of their problems as serious, but also contained and not worsening.

Then there are the fresh signs, like a rising unemployment rate for the Eurozone that just touched a record high 10.4%, that make some question whether we're calling off the dogs too soon. Are we remaking the mistakes of 2008 all over again and ignoring a string of warnings under the guise that, as long as there's not a complete collapse in Europe, we'll be okay here at home?

A quick glance at the tape shows how entrenched containment-think is with the S&P 500 up over 4% so far this year, and France, Italy and Germany up 4%, 6%, and 10%, respectively.

"I concede every point you make, except that it's necessarily bearish for the markets," says Macke in the attached clip. Among the many staying-power points he makes in his defense of the vibrant U.S. stock market and relatively healthy domestic economy, is the belief that we will continue to benefit from a flight to quality trade.

I am fine with that idea, and also in no position to refute it (yet), but when the latest and amended fiscal pact that has come out of the Eurozone includes German-style budget discipline, and the creation of outside enforcers with veto power over the budgets of sovereign nations, images of street protests and tear gas rush back to my mind.

Imagine if we let Canada audit our budget and block programs it felt were unwise or indefensible?

The point is, Europe is a mess. It is expected to go into recession, but its demise will be temporary and orderly. If that narrative holds together, we should be in for continued success. However, if and when the mandated austerity of Europe robs enough people of jobs, benefits, and promises for a better futures, the streets and squares from Lisbon to Lyon and Athens to Zurich could erupt in way that cannot be ignored.

Until then, we both agree that it would be wise to let your winners run but to keep your ''stop-loss" levels fairly snug to protect any gains that you have made.