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I'll start out by getting right to the point: I'm incredibly bearish right now. The jitteriness in the markets over the last two weeks has been more than obvious. Traders and portfolio managers are jockeying for position as they try to extrapolate the ramifications of Europe's actions. Is it Euro-TARP? Will it have the same effect? What is austerity exactly? And on and on and on.Let me try to give you an idea of what I think and try to lay out a plan of how the globalized economy could play out.I think Europe could very well destroy any hope of a recovery that we thought we might see. Not only that, I think it could push the world off of a precipice of debt that, if it were to occur, would create something resembling outright disaster. Austerity combined with savage debt service issues and crushing currency devaluation is impacting the entire world, and we're now starting to see the economic domino theory I wrote about a month ago. Frankly, I'm nothing short of terrified. These aren't words I use lightly. In fact, the last time I uttered them was July 2008 in an email to my closest friends warning them of an impending crash. Is that what we face now? Let's take it in pieces and see what we come up with.1. What's wrong with Europe exactly?
2. As Greece was the first domino in Europe, Europe will be the first domino for the rest of the world.
3. With the rest of the world in turmoil, can America really continue on a positive path? The dominoes will hit American shores -- the question is when.
So, what does this all mean for the markets?Europe has already been shut down due to volcanic eruptions (twice, the first time for about 10 days), austerity protests, and electoral tumult. That is only just now being factored into second-quarter numbers. So, their decline is well on its way. If things move as fast as they have on other issues this year, it means that we could see declines of perhaps 15%-25% in the second half alone. 850 on the S&P is roughly 25% down from here. While some will certainly chew me up, I think that it's certainly possible. I have stated for months on end that the economy is, in fact, not doing that well. Remove the massive government intervention and we'd certainly be far lower now than we are. It's obvious to me that the public won't tolerate more indebtedness by the government. Rand Paul's runaway victory in Kentucky is proof, along with many other elections we've had so far this year (strong fiscal conservatives are winning in landslide victories) and through the current administration's low approval ratings. For the last two weeks, I've been slowly selling my long positions, or hedging them while opening new short positions in line with the macro thesis I've laid out here. I think it's possible we try to make one more stab at 1150/1200 (though we may have just seen it last week), but any move higher is an opportunity to sell. Toddo has a great credo that I've utilized for many years: Opportunities are easier to make up than losses. This environment embodies just that ideology. To me, there's no reason to be in stocks right now. You will definitely get another opportunity, but that opportunity won't be there if you're out of capital.I certainly hope that I'm wrong, but I'm incredibly bearish over the intermediate term (with no real opinion short term). Without drastic and immediate changes in fiscal policy both domestically and abroad, we're in for a heap of trouble.See what inverse ETFs Ron Coby & Denny Lamson are using to play the global markets with a FREE 14 day trial to the Grail ETF & Equity Investor newsletter on Minyanville. Learn more.
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