A second key element is the state of the banks:
Small Banks Delinquent Loans
Large Banks Delinquent Loans.
So the banks are slowing dealing with the problem loans. They are slowing working through the junk and cleaning up their balance sheets. Contrast this with both Europe and China. In both of these have not even started cleaning up their banks. The European banks still don't even know which loans are junk and which are good. The Chinese banks are going to have property loans that will be delinquent. The result is both Europe and China are far behind the US. While the Chinese economy is still growing, there are signs it will slow and have the first recession in a long time. The net impact of all of these factors is the US stock market will at some time be a great place to invest.
Bur what about Europe? Isn't there is a significant risk that Europe implodes (explodes?). The banking system in Europe is slowing grinding to a halt and this will cause a severe recession for Europe. What's worse the banking system and the governments of Europe are intertwined in a very complex and dangerous way. If a government (think Greece) goes bankrupt, it will force ALL the banks in that country to go bankrupt. The banks have significant government debt on their balance sheets and cannot survive if the government goes down. But if all the banks in the country are bankrupt, then they don't make loans. When banks don't make loans, the average business cannot get loans and lays people off. This decreases taxes and forces the government to cut back. But if the government becomes more bankrupt (losses increase), then the banking sector is hit a second time. They make even less loans and cause the economy to contract further. OUCH!
A long and very sad depression can result.
One piece of good news is that the Ted Spread is falling. This is an important measure of the banking system.
This graph shows the slow drop in the risk premium for lending to banks. The system is slowing getting better.
But without a question, the raw economics of Europe is uncertain. The fact that Governments HAVE to pull back and spend less means a drag on the economy. The importance of the Government sector in Europe is huge and if it truly cuts expenditures, the economy will falter. So European banks are not lending and the Governments are cutting back. The situation is dire.
So we have two very contradictory trends: One: the US economy is ready for a dramatic rise. Two: Europe may fall into a depression. What will happen? The direction is likely to come from a 'tipping point'. In other words, some event will happen that in normal times would be minor, but it will force either a depression in Europe or a strong rebound in the US Economy.
One event that would cause dramatic changes is Iran. The Israelis are clearly unhappy with the nuclear developments in Iran. Will they act? Will a military strike occur? This would be a tipping point.
Are there any other options? The muddle through option is always possible. In other words, nothing much happens we go up a little and then down a little. We don't really go anywhere. But with the dramatic and powerful forces at work, I suspect a 'tipping point' event is far more likely.
