Just imagine what would have happened to the markets if the debt ceiling wasn't raised. Yesterday, the equity markets fell off a small cliff and gave back the gains for the year. Today, we are watching the markets on a roller coaster rideas investors try to figure out what is really happening in the economy. Europe is in disarray and many are asking whether the United States will experience a double dip recession. As everyone is focused on the markets and the economy, here are five questions to consider over the weekend.
#1 - Is Europe of 2011 Mimicking U.S. of 2008? In the U.S., it started with subprime. The banks held it and it was not worth the paper it was written on. These toxic assets lead to a banking system failure and, as a result, the federal government needed to "invest" money into the banks to save them. In Europe, the banks hold sovereign debt and the sovereigns are insolvent. The ECB is now understanding that sovereigns don't have a liquidity issue but a debt issue. The days of kicking the can down the road are over, yet coming up with a viable solution to allow for an orderly default is difficult. And, the austerity measures being put in place will guaranty that countries like Greece and Italy will not grow. Will the toxic sovereign debt being held by banks push the European banking system to the precipice of failure? It's not unthinkable. In fact, it is fairly easy to imagine.
#2 - Will Corporate Profitability Save the US Economy? In the depths of the Great Recession as earnings dropped precipitously, corporations cleaned up their balance sheets and cut their fixed costs dramatically. This was good for corporations. They began to accumulate cash and, as earnings began to increase, corporate profitability was magnified as the fixed cost cuts remained constant. But U.S. corporations are not hiring and they are not investing (at least not in America). The demand is not there and U.S. corporations realize they can do more with less. As stagnant economic growth will most likely be the norm for the foreseeable future, earnings may not continue to rise. If they do not, then profits will remain flat or, if corporations increase their fixed costs, profits will go down. While the foundations of many corporations are now strong, is the increased profitability for some more of a mirage than a reality?