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Tough Enough By: Charles Payne

When it comes to defaulting on sovereign debt Europe has an unenviable track record. On one hand, some would say that proves defaults aren't all that bad. But, on the other hand, past trends also reveal that once default occurs nations remain vulnerable and often default again. Historically, war years have also played a role in European sovereign defaults. France's last default came at the peak of the Napoleon Empire. In May 1804, Napoleon became Emperor of the French, and by 1812, controlled 130 departments (colonies and overseas regions) with a combined population of 45.0 million to perhaps as much as 95.0 million people. There were military campaigns in Germany, Italy, Spain, and the Duchy of Warsaw.

Then there was the Spanish Civil War, which lasted from July 1936 to April 1939, each year causing the nation to lapse into default. The irony is war brought America out of its Great Depression, not mindless spending or massive government. The thing is the seeds of civil war have been planted and are growing wildly as the current Administration continues to take tax dollars and funnel it toward a behemoth government of overpaid union workers. There isn't going to be bloodshed in the streets but there will be anger and resentment. After Pearl Harbor, all Americans were on the same page, and that is how we worked through massive debt. All Americans had their interests aligned.

The effort to fight back against tyranny brought women into the workforce. Rosie the Riveter was a symbol of pride and strength. In another twist of fate, women are leading the employment charge again in part because jobs along the lines of those manual labor positions are fading in the face of technological improvements and offshore labor. Even if federal spending got a grizzled veteran of manual labor a temp job toting solar panels from a flatbed truck to a government building it's hard to imagine that person posing for a poster and flexing his bicep. There is no pride in these schemes and temp jobs that have been used to assuage lifelong welfare recipients. So the debt is just short-term spending with negative long-term ramifications that span esprit de corps and fiscal soundness.

Europeans have had it on auto pilot for a long time and now they are paying a price that would be much pricier if they don't draw lines in the sand now. While unity is fractured with strikes and marches throughout the continent, European leaders have locked arms because they know once the first domino falls, they all could fall, over and over again.

Austria endured three defaults in eight years, Portugal five in 24 years (four during the 1800s). The G20 gathering was a teachable moment, but let's hope the professor was willing to learn from people that know better than he knows. There is no doubt lower sovereign debt ratings on the U.S. government would be devastating. Europe so dominated the world in the past recovering from defaults, while painful, still saw them enjoy economic supremacy to most of the planet. Not so this time around. Moreover, faulty economic policies and default were either brought on by war or led to wars with devastating outcomes. Germany has its own tug-of-war because the best way to be the de facto leader of the continent is through the Euro, but it's not about to go down the road of economic devastation again. As it stands now, Europe is in a hapless situation, having run out the untenable regime of long vacations, early retirements, and lavish pensions to its foregone conclusions.
China and Japan own the most U.S. government debt, and along with the rest of the Asian continent are poised to dominate global GDP for the next hundred years or more. While we lie about spending our way to prosperity in a real bid to reshape the nation into one run and ruled by a central government mechanism, others are forging ahead. Europeans are cleaning up their act, reluctantly perhaps, necessarily for sure.

This week 1.3 million unemployed people will have to hit the bricks with a sense of urgency they might not have had a week ago. Their unemployment benefits have stopped. It seems cold-blooded and mean but after a couple of years it will be the best move for many people whose skills have surely eroded and will erode even more as they sit at home waiting. Job placement experts concede the longer a person is unemployed the less likely it is they will find work. There are two other facts I think must be acknowledged:

* We must unleash that survival instinct among Americans in general and drop the lie we can all be wards of the state...or should even want to be wards of the state.

* We cannot afford to spend money we don't have. Spending programs must be offset or we will see what Europe has found out the hard way.

Or to quote Marcus Tullius Cicero: "people must again learn to work, instead of living on public assistance."

Are We Tough Enough?

The term "political will" is tossed around a fair amount; I use it all the time. But, what does it mean? Moreover, what does the lack of political will mean? It's one of those questions that goes hand in hand with one few people are asking. The recurring theme on Fox Business Network is whether the world is broke. It's a valid question. But in America, the biggest question is whether our spirit is broken. Watching the World Cup, it felt like Ghana wanted to win more than America did and while some will see that as sacrilegious, I wish I could argue it meritless. Things aren't going right.

* We can't plug a hole in the bottom of the Gulf.
* We still don't have an official reason why the Dow dropped 1,000 points in a flash.
* The longest war in our history is getting messier.

I know Americans are tough but the nation has a soft underbelly. We have voted for leaders that promise us soft landings for a long time. What have you done for me lately has created a political culture of pork barrel spending and finger pointing when coming up short. In many respects, we must come out from behind the aprons of our elected leaders and force the issue. We must awaken our toughness in time to remind ourselves greatness is earned not bestowed. Sure, the legacy of success is important, but not when we think it's an entitlement rather than responsibility. I think our spirit is broken. Unlocking grit and determination could also repair our spirit. This period in time is where we make the decision. We can take the route Europe took and coast on past greatness until that well runs dry or we can gut it out.

The legitimate question is, are we tough enough?

The Market

There was simply no oomph in the market last week as a general cloud of disappointment and doubt came in after an early failure to clear key resistance points in various indices. It was all downhill from there. Economic data didn't help, but there was more to the malaise. The market needs a spark. There are plenty of chances for that spark to occur this week.

* Monday- Personal Income & Consumption (May)
* Tuesday- Consumer Confidence (June)
* Wednesday -Chicago PMI (June)
* Thursday- Construction Spending (May) & ISM Index (June)
* Friday- Nonfarm Payrolls (June) & Unemployment Rate (June) & Factory Orders (May)

What's the deal with the market? Investors are wondering if the market will ever get back to a place a person can put money into a few names and just watch it grow. After a tumultuous decade that saw the big indices lower, many have given up hope. The thing is, however, while the market is down, GDP only decreased twice during that period and (domestic) corporate profits have tallied $10.3 trillion. It isn't unreasonable to wonder why stocks aren't higher based on profit growth. The direction of the market does mirror that of earnings, which could be good news this year if the strong first quarter of profits holds up.

The correlation between GDP and the market is tougher to pin down. From 1999 to 2009, the Dow was down five times year over year (on the last day of the year) but GDP was down less during those same years. Last year, GDP was down 2.5%, but at the end of the year the Dow was 18.8% higher. The point is there are a ton of profits not reflected in share prices. The only thing that might reverse that is lower expectations. Sadly, that is what the market has come to, a reflection of the expectations game rather than actual results.
 


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