Global Market Outlook: The Pain In Spain Is Too Big To Be Contained

In a seriously misguided effort to balance its budget, In early September Spain Passed Largest VAT Hike In History. I wrote at the time, "Stunning Ineptitude Will Make History Books". Spain's unemployment rate is over 25% and the youth unemployment rate is near 53% yet the fools in the Spanish government hiked taxes yet again, this time by the largest amount in history.

At the very beginning of the year I was on CNBC commenting on the horrible time the FIRE sector should be expecting. Well, at year end I see FIRE burning amidst all of this Hurricane damage.

So, Spain finally gets a bailout, as I pretty much guaranteed in The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain and The Spain Pain Will Not Wane: Continuing the Contagion Saga. I'd like to draw attention to an excerpt from the aforelinked article:

 The MSM reports Spanish Short-Term Debt Costs Reach Alarm Levels

When Spain beat Germany in the World Cup, I tweeted that Germany was going to double its resolve to destroy the Spanish economic with deflationary monetary policy. And it’s really worth checking out this eye-opening chart from Stephen Gordon which shows the extent to which Spanish people are bearing the burden of economic pain in Europe:

Just over two years ago I warned that Spain posed a significant threat to the EU area economies. This was a very popular stance, and since I'm more of a medium to long term strategist and Spain didn't experience any immediate pain, my stance was considered even more morose. Well, luckily, I supplied ample research to paying subscribers who were well prepared for what is now evidently coming down the pike.

Determining the “pain threshold” beyond which the euro appreciation would significantly impair the recovery is crucial at this juncture. Deutsche Bank's quantification of this “pain threshold”, is not fixed but depends critically on the pace of global growth. If world demand accelerates from a current pace of 1.3% YoY to 4.2% YoY by Q3 2013 (30% below trend), as per OECD forecasts, the EURUSD exchange rate which would be consistent with maintained competitiveness would stand at 1.37 (not far from where we are).

Article written by Prieur du Plessis, editor of the Investment Postcards from Cape Town blog.One of my major concerns regarding stock market valuations is the earnings outlook, and specifically that profit growth would not be at a level to support share prices. What are the chances of a profits recession?