Europe’s Bogey-Man

Investors have been acting as if there is a financial bogey-man lurking
out there
, ready to confirm the sum of all our financial fears. Is it
U.S. recession? Is it European debt? Is it the U.S. debt downgrade?
Congressional dysfunction?

Of course, the combination of worrisome events is enough to push investor
anxiety into overdrive. But at the heart of the fear in the financial
markets is European debt.

Again, yesterday we discussed the rumors that were swirling around France’s
bank, Societe General…

Is There a Bogey-Man Out There?

In 2008, we knew that the mortgage-backed securities
depleted the cash reserves at banks to the point that they were insolvent.
In January of 2010, it was the uncertainty of Greek sovereign debt along
with other European countries that caused a very sharp pull back for stock

But it’s more difficult to find a culprit for the declines we’ve seen

Yes, there have been weakening economic data, to the point that GDP growth
may be below the 2% line. That’s close enough to negative growth that some
are throwing around the “r” word: recession.

Are Greek Debt Issues Pushing Stocks Lower?

The S&P 500 is doing its best to build on the
half-point rally it put together last week. All in all, there’s no reason
to expect stocks to reverse recent weakness and launch toward previous
highs. It’s better to see stock consolidate after the recent declines,
and, perhaps, grind higher.

The S&P 500 is trying to take back the first
resistance level at 1,280 this morning.

Fed Outrage: European Banks Benefit Most From QE2

In an international game of 3-card Monty, it seems as though the Federal
Reserve’s Quantitative Easing (QE1/QE2) program has done little else but
to help capitalize insolvent European banks.

Take a look at the chart below, which shows the “coincidental” infusion
of nearly $700 billion into the balance sheets of Foreign banks at the
same time that the Federal Reserve pumped the same amount of money into
the markets via QE2.

It’s not clear exactly how the funds ended up on the balance sheets of the
European banks, but what is clear is that American banks experienced no
such balance sheet boost over the same period. Why is the Fed now
backstopping European banks? Well it’s pretty clear that Europe’s sovereign
debt issues are somewhat more advanced that America’s, so maybe Bernanke is
trying to quarantine those issues to the other side of the Atlantic.

In any event, the effect is clear, regardless of how it’s achieved.

And the lesson to be learned is now an old one: you can’t trust the Fed
or the banks.

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European Debt vs. U.S. Economy

European debt issues are once again weighing on the
stock market. Where have I heard that before? Oh yeah, it was last year
about this time that
defaulted and Greece‘s debt problems came to
light. Unfortunately, these debt problems are not one and done.