Couple this news with yesterday’s Employment Trends Index (another post-recession high), stabilizing home prices and consumer confidence and the case for a continued U.S. economic recovery remains viable.

However, with Europe taking a drastic turn for the worse in recent days and Germany now finding itself ostracized, it feels like the union is facing its fiercest test yet.  Germany must relent to Eurobonds so that trade and budget deficits in peripheral countries are recycled by German surpluses.  

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“Germany is pursuing a “balance-of-payments (BOP) recalibration” by forcing these nations to become surplus countries.  This involves increasing competitiveness via internal wage deflation (i.e. cutting costs), in an effort to drastically reduce or eliminate their trade deficits.  It also requires that governments eliminate their budget deficits by raising taxes and undergoing austerity.  As long as German-mandated austerity persists, the probability of a Eurozone split up will increase.  These policies are resulting in deep recessions and are tearing apart the social fabric of Europe.  Resentment towards Germany and the financial elite is becoming engrained in the psyche of regular citizens in the periphery.  Remonstrations are progressively intense.  Like trends in financial markets, psychological trends aren’t linear.  We are currently in a lull and protests are likely to pick up in the coming months, as the effects of austerity harshly bite Main Streets of periphery countries.  Unfortunately, these countries are only in the middle innings of this BOP recalibration, at best; more pain lies ahead.  Political risk remains extremely elevated.  Furthermore, existing government and private debt is so large that debt traps are becoming evident in Greece, Portugal, and Spain.  They in turn will lead to further austerity and worsening political and social trends, a nefarious feedback loop.”  

—- RCS Investments Macro Outlook (Begn-2012) —January 16, 2012