Drastic Budget Cuts to Euro Nations Signal Impending Disaster Ahead

One idea that I cannot stress enough that I mentioned last post was that the drastic budget cuts some of these indebted European nations are making could signal impending economic disaster for Europe, making default for this high debt countries even more probable. On the surface, obviously cutting government spending looks to be a good thing because governments will not be racking up more debt. But it severely hampers a governments ability to pay back what they currently own with lost revenue. Let's face it, government spending stimulates the economy to some extent, so depending on what the governments are cutting back on could be a big mistake.

If a government is forcing the worker to work 5 extra years... That is good because it is not a value added benefit. It also helps alleviates pension problem by forcing the worker to pays 5 more years and the obligation is 5 years less at the end of the life which is significant with compounding. With the average age of people getting older every generation it is not unreasonable to raise that age to 70+. This is a very easy solution in my books.

If the government stops building roads and highways, cuts back on education and health care and other economic stimulating strategies, this will have an immediate adverse effect on local economies with the end result being drastically reduced government revenues.

Problem with European consumer nations is that they have a lot of fat and most governments will find it easier to cancel government contracts and grants than raise the age of retirements and cut back vacations and reduce pensions.

The proof is in the pudding with Argentina when the drastically cut back which reduced their revenues to the point where they defaulted. Leverage is important if it is used to stimulate growth, science, the arts the economy and not pay someone to sit in their vacation home in the Mediterranean at 55 till they die.

Are the PIGS about to make the same mistake Argentina did? But on a much grander scale?

Anyway it is shaping up, this fall is going to be some exciting times. Personally, I am starting more and more to move to the double dip camp... Just on entertainment value alone, another severe crash with wild rebound is much more fun than chop chop for the next 2 years. Don't you agree?

Baltic Dry Idex... A contrarian signal.

With all this chaos in the markets, including the crisis in Europe and China's downswing. There is a lot of talk out there abotu a double dip recession. Problem is that NA companies are doing very well with positive economic numbers coming out of the the States and Canada. Not sure where the overall direction of the market is heading or whether this is going to be more than just a steep correction one factor you have to consider is the Baltic Dry Index which is a barometer of economic activity. So far the BDI is continuing to rise in a contrarian signal against the declining market.

This is a great index for economic outlook and so far it is signaling not to worry as shipping has not slowed down during this period but infact increased against the latest declines in the market. Until this index starts tipping down, that this is infact just a steep correction. I doubt that this correction is over immediately and we start a new run, but talks of a double dip recession are a little early in my opinion. This debt crisis will have to get much bigger for the global economy to shut down again.

Another note, as long as the bailouts keep happening... the markets won't falter like they did in '08/'09, but the cost of these bailouts will be steep in the future taxing our kids too death through inflation and increased taxes to fund the greed, laziness, and entitlement attitudes of the baby boomer generation.

Euro Leading the Markets

Not sure what to do in this volatile market? With Europe on jitters and the EU being held together with a ball of yarn it seems these days everything is taking its lead off the Euro. Yes we have many other fundamentals in this market the should be driving us, but when fear and panic take over and Euro starts falling, it sets off a domino effect and investors start selling everything out of fear. So for the immediate turn until Europe gets off the front pages with the debt crisis, markets will continue to take their cue from the Euro.

Happy Trading