That Teet is Dry

While I have on a fairly regular basis been pessimistic about the U.S.economy - and various others -for the past three years, I think looking back that I was not off the mark. The stock markets by and large rebounded a good bit but economies world wide have not really done so. And now I am sounding a few alarm bells. We were suckling off of government stimulus for a few years and all seemed well, but you need to now pull away from that teet as it is dry. Government deficits are simply too high so the stimulus is no longer flowing.

Let's start with the U.S. First, QE2 is done. I personally think we are just a few months from QE3, but that will require the financial environment allowing dear Ben to justify doing so. It will happen, but it will take a several months for Mr. helicopter to refuel.

Then there are the U.S. deficit problems. They are real and not going away. I appreciate politicians of both parties finally waking up to the need to deal with the mess. I am not, however, doing cartwheels over how entrenched the sides seem to be in what is needed to fix the problem. The polls show that the vast majority of the population is fully in favor of using both expense reduction and tax increases to deal with it, which I personally favor. Time to burn this candle at both ends. Indeed, even the majority to Tea Party folks agree with this approach. Kind of a share the pain approach. Voters want this done but the politicians cannot get it done because of - you got it - politics.

I am sure they will do this in some shape or form eventually, but let's please vote them all out the first chance we get. In any event, prepare yourselves. It will be painful however it is done. Not as painful as Greece is suffering, but painful. And if we do not do it now we will suffer Greece's fate or worse. The pain will be severe and it will make a significant hit on GDP, which I do not think is yet worked into the stock markets, so prepare yourself there as well. With stimulus ending and austerity and debt reduction (okay, there is no way we are reducing debt, but we need to slow the increase) we are in for a several anemic years, if not worse. It is in the cards.

And then there is the E.U. Greece has laid down the gauntlet. They are done their pain and the rest of the countries in the EU need to fill in the void. They are simply not going to take it any more for the rest of the EU. Greece and other PIIGS, such as Ireland, finally realize they have leverage. They have had this leverage all along but are just now figuring it out. The point is that Germany and France need to save their own banks who have exposure to the PIIGS. They have been supporting Greece and the others for this reason and this reason alone. But from Greece's perspective, f they default now - first in line - they will get it over with and probably fair this storm pretty well. They have been doing severe austerity for the likes of German and French banks (and U.S. on an indirect derivative basis) and the are fed up. More to a point, the politicians are going to be voted out if they do not take a stand. So the rest of the EU needs to decide if they will fill in the void. It should be interesting. Financially, Greece, and probably then Portugal, are not a big deal, but Germany and others need to consider the knock on effects to other PIIGS, as in Spain and Italy. This will be interesting.

So I say, hunker down. It is getting very ugly out there - and I have not even mentioned problems in China and India.

Disclosures: None