By Anthony LaLota, Rutgers University
An “All or Nothing” day on Monday, Oct. 17, resulted in all major indices declining significantly, amidst further Euro Zone fears adversely affecting capital markets, as Germany casted doubts over expediency of the Greek bailout. In other foreign events, China's annual economic growth fell to 9.1 percent in the third quarter from 9.5 percent in the previous quarter, as tight domestic monetary policy and easing foreign demand hampered economic output. As a result of the stock market weakness domestically, heavy outflows into bonds took place, as the yield on the 10-year fell from 2.25% to 2.16%. Weak corporate earnings certainly didn’t help in terms of those hopeful for a sustained recovery of U.S. equities. Notably, IBM stock was down, as “Big Blue” missed earnings estimates, an unusual occurrence for the tech stalwart. Greece, however still continues to wield the most significant magnitude over the global economy, as social upheaval has begun to take place. Coined “The Week of Thrills” in reference to a 48-hour strike beginning Wednesday, as many as 50,000 to 60,000 protesters were expected to become active in public displays of social unrest last week. It is clear that the Greek saga is still the primary determinant of economic activity, and, by extension, the health and perception of global capital markets.
If a concrete solution is not agreed upon in the near future, there are numerous ways in which the U.S., as well as many other countries such as China, would be adversely affected. Consumers leery of the uncertain state of the global economy will be unwilling to spend, and this lack of demand will hamper economic growth to an even further degree. For this reason, in conjunction with significant foreign exposure to acidic Greek debt, a solution needs to come to fruition. In the event that European powers, namely France and Germany, cannot come to an amicable solution soon enough, dire consequences, such as a global recession, could very well take place. The problem with Greece is that its capital structure is severely out of order; due to its insolvency, it lacks a balanced budget and it needs to borrow in order to keep functioning. This vicious cycle places undue stress on the more affluent members of the Euro Zone. In previous essays, I have advocated an orderly default of Greece to avoid additional capital being pumped into a toxic Greek situation, and I will continue to do so. Until an actual strategy comes to the forefront, expect the recent domestic volatility to continue, as the Euro Zone continues to overshadow a U.S. economy that may actually be showing signs of life, however minuscule. As noted by the Fed Beige Book Report, the economy is growing, albeit at a quite slow rate. The recovery is taking longer than anticipated, but at least some growth is taking place, which is certainly more positive than the alternative.
