Here's hoping traders return from their long weekend too relaxed, refreshed or hungover to make any sudden moves. Heaven knows the equity markets have been volatile enough lately. The major averages snapped a four-week losing streak last week, albeit by posting ever-so-slight gains, but still remain as jittery as an overcaffeinated chihuahua. With sovereign-debt fears likely to weigh on traders' minds in the days ahead, don't be surprised if the market keeps trembling.At 10,099, the blue-chip Dow Jones Industrial Average ($INDU) is off 3.2% so far this year and is struggling to remain above the supposedly key 10,000 level. The broader S&P 500 ($INX) has lost 3.6% in 2010 and the tech-heavy Nasdaq Composite ($COMPX) is down 3.8%. Those are troubling-enough declines, but even worse when considering that since the wave of selling began on Jan. 19 (the S&P 500's 52-week high), the broader market has coughed up 6.5%.
In all fairness, this volatile, downward trend is not without reason. To paraphrase a famous incompetent: The market has its known unknowns (e.g., is the economy getting better or worse, and at what rate?), and its unknown unknowns (bad-loan landmines). The Greek debt tragedy falls into the latter category, and despite Germany's vague talk of maybe leading some kind of eurozone bailout brigade, sovereign-debt uncertainty isn't going away anytime soon.
High Price for a Bailout
Indeed, the enormity of what's required in Greece is staggering to a degree most Americans probably don't comprehend. John Mauldin, the prolific financial writer and president of Millennium Wave Investments, recently tried to put the whole horrible mess into perspective for them. What's potentially being asked of Greece is unimaginable in the U.S.
If Greece complied with the steep budget cuts tied to some sort of rescue, that would be the equivalent of the federal government slashing spending by $560 billion this year and again next year, writes Mauldin. "That would mean huge cuts in entitlements, Social Security, defense, education, wages, subsidies and on and on," Mauldin says. "And repealing the Bush tax cuts? That would just be for starters."
The 1990s policy of "freeze the budget" and try to grow our way out of it wouldn't be an option, nor would would gradual budget cuts of a few hundred billion a year coupled with tax hikes. "That combination of tax increases and budget cuts would guarantee a U.S. recession," Mauldin says. "Unemployment, already high, would climb higher. And yet that is what the Greek government is being asked to do as the price for a bailout."
Euroland has barely begun to deal with Greece, not to mention the other candidates for contagion such as Portugal and Spain. The market knows all too well that the Greek debt debacle isn't the beginning of the end. It might not even be the end of the beginning.
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