A crumbling Europe tests America's foundation
We built a castle on a cloud, Brown writes. With European markets back in turmoil the only question is whether or not our castle on a cloud can remain aloft, above the disturbances at ground level.
A group of riot policemen is engulfed in flames after protesters threw petrol bombs in Athens' Syntagma square during a 24-hour labour strike Wednesday. As Europe's economy falters, Brown wonders what the future holds for US markets.
Yannis Behrakis/Reuters
Syntagma Square in Athens is once again filled with the sound of beating drums and the flames of firebombs as the entire nation walks off the job for the first general strike since the coalition government was formed this past June. In Spain, the situation is rapidly deteriorating; protestors beat up a policeman in the middle of the street last night in full view of the news cameras - we're talking about a heretofore unseen level of rage as PM Rajoy readies his official bailout request to the Northern purse string-holders.
Which brings me to the US equity markets, which are coming off of a virtually uninterrupted melt-up since the end of June, with virtually every sector and stock participating regardless of economic sensitivity. This in the face of eroding fundamentals for many bellwether stocks and industry groups, Fedex and Caterpillar being just the latest examples to tell us how lousy things are.
But we ignored the fundamentals and rampaged higher on sentiment. This is how you explain a stock market that runs up 15% with no change in earnings estimates for the forward two quarters. The improvement in sentiment - driven by the assumption and then confirmation of permanent Fed support - is responsible for virtually all of your portfolio's gains since the Summer Solstice, no offense to the regard with which you hold your stock-picking abilities. Even the most bullish strategists with the highest year-end S&P targets acknowledged that multiple expansion was the key ingredient for their forecasts, none of them were looking for an acceleration in fundamentals by year-end.
In short, we built a Castle on a Cloud, the accumulated moisture of performance-chasing and confidence were its only foundation. And now, with European markets back in turmoil - with all of the volatility and drama that brings - the only question is whether or not our Castle on a Cloud can remain aloft, above the disturbances at ground level.
That's the thing about Castles on Clouds - a surrounding siege army is not required for them to fall, only a change in air current that dissipates the molecules.