Why It's Crazy to Take Encouragement on the Economy from Europe

Financial headlines this morning said U.S. stocks were soaring. Why? (emphasis mine)

Stocks jumped Friday, setting the stage for a four-session winning streak, after a sharp jump in existing-home sales and some encouraging economic data out of Europe.

First let me say that I’m always skeptical of these financial press explanations of why stock indices are doing whatever it is they do. It’s usually just wild speculation. If the stock markets go down, reporters search the headlines for bad news and then point to it and declare: “That’s the reason.” When they go up, they search for good news and do the same thing.

Nevertheless, any investor basing his bets on what European markets are doing should have his head examined. Here’s why:

  • The fact is, European governments didn’t pretend that massive increases in spending equaled “stimulus.” They increased the money supply to unfreeze the credit markets, as the Bush administration did simultaneously. But the Europeans didn’t use the panic and fear as a cover to send trillions of taxpayer dollars to pet pork projects as the Obama-Reid-Pelosi troika did.
  • The European governments aren’t trying to push through the biggest new entitlement program since Social Security, either.
  • Corporate income tax rates in Europe were already much lower than they are in the U.S.. Under the current government here, taxes and regulatory burdens on businesses are increasing on a daily basis.

So yes, the business outlook in Europe is probably getting brighter. But why anyone would assume that would translate to improvement here is beyond me.