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U.S. Will Not Decouple

U.S. Will Not Decouple

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Published by: richardck61 on May 05, 2012
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Continental Capital Advisors, LLC May 4, 2012
1
The US Economy Will Not Decouple
During the past couple of years, we have written about the debt situation facing both Europe and theUnited States. The economic data coming out of Europe has rapidly deteriorated
 
yet the USeconomy has been resilient. This scenario has caused investors to believe that the US can decouplefrom the troubles in Europe. However, the US is as indebted as the countries in Europe (Figure 1).Instead, the key difference between the economies of Europe and the US has been the USGovernment’s and US consumer's continued access to cheap credit while credit has tightened inEurope. Therefore, it is only a matter of time until the contagion from Europe spreads to the US.Figure 1. 2010 US Debt/GDP Relative To European Countries (USD)
Sources: Eurostat, Continental Capital Advisors
Since 2010, commentators have argued that Greece was an isolated incident. However, what startedin Greece has now spread to Italy and Spain. Despite the efforts by the ECB and IMF to supportEurope’s banking system, the 3
rd
and 4
th
largest economies in Europe have contracted forconsecutive quarters and their stock markets are nearing 2009 lows (Figures 2 and 3).
 
Continental Capital Advisors, LLC May 4, 2012
2
Figure 2. 5-Year Chart of the Italian Stock Market (FTSE MIB Index)
Source: Bloomberg
Figure 3. 5-Year Chart of the Spanish Stock Market (IBEX 35 Index)
Source: Bloomberg
 Though the US has similar debt metrics to many European countries, US equity markets, by contrast,are 100% higher than their March 2009 lows. Led in large part by the consumer sector (Figure 4shows the S&P Retail index, RLX), US equities have managed to overcome two economicslowdowns in two years, in part because personal consumption expenditures have risen to a recordhigh (Figure 5) despite numerous headwinds facing the consumer. As we discuss below, the currentlevel of consumption is not based upon sound fundamentals but instead on the ongoing ability toaccess credit (Figure 6).
 
Continental Capital Advisors, LLC May 4, 2012
3
Figure 4. S&P Retail Index
Source: Yahoo! Finance 
Figure 5. Personal Consumption Expenditures
Source: St. Louis Federal Reserve

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