Tough Times Are Coming Regardless of Which Way Greece Goes

by Jason Simpkins, Outsider Club Yesterday, it looked like a Grexit was a done deal. Today, the outlook is more optimistic, though far from a sure-thing. At this point, it’s basically a coin toss as to whether or not Greece will still be part of the Eurozone come Monday. However, one thing is for sure: Tough times lie ahead. Serious damage has been done regardless of whether or not Greece gets another bailout. In fact, what’s to stop this whole charade from recurring sometime down the road? Whether it’s bailed out or not Greece is a mess, and sooner or later, the reckoning will come. It’s not as if an 11th hour deal will wash away all the problems facing Europe, the United States or the global economy, either. Indeed, no matter what happens Sunday, we’re still facing the same economic headwinds… The Currency Conundrum This whole ugly episode has badly undermined the euro. Here’s a look at what the currency has done over the past year… Euro 7%2F10%2F15 There’s nothing out there to change this trend. If Greece leaves, it raises questions about the sustainability of a 19-nation currency bloc. If it stays, you’re left with a currency that’s only as strong as its weakest member. Furthermore, Europe is still pursuing its expansive monetary policy through a trillion euro quantitative easing program. China’s ramping up, too, cutting rates and lowering reserve requirements in the face of a rapidly cooling economy and crumbling stock market. That’s happening independent of Greece. And it all adds up to a stronger dollar, which is bad news for the United States. Off Balance The dollar’s rise over the past year has damaged U.S. multinationals and thrown our trade deficit completely out of whack. The U.S. trade deficit averaged $43.3 billion in the first quarter, up 5.2% from 2014. That was good enough to shave 1.9% off of GDP growth. So far this year, the trade deficit has increased by $1.1 billion, or 0.5%, from the same period in 2014, as exports decreased $26.5 billion. A Greek debt deal isn’t going to fix that imbalance. It won’t work wonders for Eurozone growth, either. On the whole, the Eurozone’s economy edged up just 0.4% in the first quarter. The German economy, the strongest in Europe, registered a 0.3% expansion. Greece’s GDP fell by 0.2% in the first quarter, following a 0.4% contraction in the fourth. Those declines will deepen if the country accepts more austerity measures in return for a bailout. And they will outright implode if a deal falls through, leading to a default. Remember, this is a country that has imposed stringent capital controls over the past week, limiting its citizens to ATM withdrawals of just 60 euros per day. Its unemployment rate is 25.6%. It’s poised to drag on Europe’s growth for years to come, bailout or no. And again, the U.S. economy will be negatively affected. U.S. GDP contracted 0.2% in the first quarter. That’s bound to worsen with Europe entering a new period of protracted turmoil and China struggling to find its footing. As for stocks and commodities… Retrenchment Oil hit a three-month low on Monday, as fears over Greece accelerated. It’ll likely fall further as economic growth weakens, the dollar strengthens, and supplies mount. Precious metals will be hurt, too, but they could also get some help if the market prices in a delay to the Fed’s promised rate hike. Indeed, many speculators have been selling off gold and silver anticipating tighter monetary policy. But the Fed’s determination to raise rates will be severely tested if the U.S. economy tips back into recession. Furthermore, the IMF and European policymakers have already asked the Fed to hold off, fearful of what would happen should the central bank spur the dollar’s rally with a rate hike. Meanwhile, corporate profits are on the ropes. As Jim Collins pointed out on Wednesday, S&P 500 earnings grew at a paltry 0.8% in the first quarter and are estimated to have contracted by 4% in the second quarter. The average North American company lost $0.08 per share due to currency fluctuations during the first three months of the year, almost double the average in 2014. As a result, North American and European companies lost a combined $31.68 billion, 55% more than in the fourth quarter. And the second quarter has been even bumpier. Companies from Facebook Inc. to Microsoft Corp. have already warned that their bottom lines will take a bigger hit. So keep your champagne corked. No deal has been struck yet. And no deal that gets done is going to save the global economy. Tough times lie ahead. Get paid, Jason Simpkins

 

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