What matters more: Europe weakness, a China slowdown, or a possible U.S. recession?
Real easy. It's Europe. Here's why:
When Fed chief Ben Bernanke talks about significant downside risk, believe me, he's talking about significant downside risk from a collapse in Europe that might freeze credit. We don't have significant downside risk here in this country. Anyone who listens to ANY conference call from Nike (NKE) to Oracle (ORCL), from General Mills (GIS) to Honeywell (HON), and from Norfolk Southern (NSC) to Federal Express (FDX),all of which we just heard from this week, knows that the U.S. is pretty good. Not great, but not horrible, either.
What could make it horrible, though, is a sudden credit crunch in Europe that could reverberate here. I am sure that Bernanke's also worried about all of the confusion coming out of Washington and the inability of Congress and the president to get serious on anything, let alone job creation. But Bernanke knows that Europe is way behind us in fixing its banks, and the sovereign debt crisis is real and alarming. So, no, we aren't THE factor in this world economy.
How about the slowdown in China? Sure, they have a real estate bubble. And, yes, they have inflation of all kinds. But if you get copper and crude collapsing, sorry, I am not all that concerned. The crashing of the metals this week says China's problems with inflation are getting better, not worse. We know the Chinese can turn on the economic jets any time it wants. China's a bit of a non-issue.
But Europe? Just look at today. We looked like we were down big. But we caught a whiff of a possibility of a French TARP, Europe rallied, and then we reversed. If there is no TARP or no Greece deal, it is perfectly reasonable to think that we could have a 10% decline in the averages.
I don't know anything here or in China that could cause that kind of decline.
Remember, this is a macro world now. China's got a macro situation that can be dealt with. After all, nobody does capitalism better than communists these days.
The U.S.? Everyone knows nothing good or bad is coming out of our gridlocked country. But Europe? It's either a catastrophe or no catastrophe. That means the next thousand Dow points are in their hands, not ours. Unfortunately, they are less likely to be up a thousand than down a thousand given their lack of spine, vision and creativity, while we go down to the wire for the problems plaguing them.