The G20 meeting that starts November 3 could put a stop to the doubts about the euro debt deal--will it, though?

10/31/2011 5:03 pm EST


Jim Jubak

Founder and Editor,

Definitely backlash day.

Today the market saw selling because European banks won’t be raising much new capital, because the Italian government refuses to take reform seriously, because even a leveraged European Financial Stability Facility isn’t big enough to backstop Italy and Spain and because stocks were up so much last week that taking profits today seems like the thing to do.

So far the selling has taken the Standard & Poor’s 500, which closed at 1253, down through both of the important resistance levels it looked like U.S. stocks had taken out last week at 1274 and at 1265. I think this now-it’s-a break-out/now-it’s-not vacillation is exactly what we should expect from stocks when the underlying economic fundamentals are so uncertain.

I think it’s likely we’ll get another market bounce from the two-day G20 meeting that begins on November 3. Leaders of the world’s largest economies will undoubtedly talk about the progress embodied in the euro debt deal (even if they don’t believe there was any) and come out with a statement full of vague goals and programs for moving the world past this crisis. In the very short term that should be enough to put the market on a positive footing again.

That’s if, and it’s a vey big “if,” the G20 meeting can put some meat on the bones of last week’s proposal in the grand plan to leverage the European Financial Stability Facility to something like $1.4 trillion. EuroZone leaders left all the details to that one a big “To Come” and this week the financial markets have started by asking not only how but raising doubts about whether it can even be done at all. Convincing the markets that this is a real plan would go a long way to putting one or two doubts about the euro debt plan to rest.

But these short-term flourishes aside, what worries me about the euro debt deal is its concentration on austerity and tighter monetary conditions rather than growth. Add those to the trend in the United States toward budget cuts and the likelihood of de facto tax increases when the current do-nothing Congress does nothing to prevent some mildly stimulative measures passed at the end of 2010 from expiring at the end of 2011.

Put all that together and it’s hard to see where the economic growth in the developed economies is supposed to come from in 2012.

Whatever momentum stocks can put together in the last quarter of 2011 runs straight into that question for the developed world next year.

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