In Europe, the euro debt crisis is nothing but bad news.
Riots in Greece. Strikes in Spain. Shrinking paychecks. Unemployment rates of 20%. Rising taxes. Cuts to government services. Hard times for as far as the eye can see.
In the U.S.? Sure, the crisis has sent a shiver through the stock market, but it's also responsible for falling interest rates, cheaper mortgages and lower gas prices.
In the medium term, the crisis might even lead to sooner-than-expected turnarounds for emerging stock markets from Brazil to China.
Go figure.
Winning and losing
The euro debt crisis has sent stocks tumbling from New York to São Paulo to Tokyo on worries -- well-founded worries -- that the crisis will spread from Greece, Spain and Portugal to, first, France, and then to banks as far away as California.The People's Bank of China isn't talking, but Beijing's foreign-exchange reserves, held increasingly in euros in recent years as China has diversified away from the U.S. dollar, have taken a beating from the 15% decline in the euro. Prices for commodities such as oil and copper have plunged.
But no bad deed goes completely unrewarded. And the euro crisis is actually good news if you're thinking of buying a home in the United States or own a portfolio full of U.S. Treasury bonds.
The crisis could even make U.S. stocks the best-performing in the world for a while.
Further afield, the crisis has fed into a relentless decline in emerging-market stocks. The iShares MSCI Brazil Index ETF (EWZ, news, msgs), for instance, is down about 13% for 2010, and the Shanghai stock market is in a bona fide bear market, with a better than 20% decline from its November 2009 high. But for these markets, the euro debt crisis promises an accelerated end to the decline and a quicker rebound. (For more on China's bear market, see my previous column, "China's dangerous balancing act.")
Why bad news is good news
What are the magic ingredients that have turned what is unrelievedly bad news for Europe into good news for U.S. homebuyers, U.S. investors and developing-economy stock markets?Lower interest rates and lower inflation.
That's a huge turnaround. The yield on 10-year Treasurys had been on a march upward as financial markets prepared for the Federal Reserve to start increasing interest rates and as bond buyers demanded to be paid more to take on the risk of a falling dollar. From 3.14% on May 15, 2009, the yield climbed to 3.94% on April 9, 2010. On some days, it flirted with the psychologically important 4% threshold.
And then, as the euro crisis hit, the yield on Treasurys plunged. In the bond market, where daily changes in yield are normally measured by a few hundredths of a percentage point, the yield on 10-year Treasurys fell by 60-hundredths of a percentage point (0.6) in a little more than a month.
That's a 15% decline in yield. If we were talking about the Dow Jones Industrial Average ($INDU), we'd be shaking our heads over a 1,600-point drop in the index.
The U.S. Treasury market has seen bond buyers go from worrying about interest-rate increases as early as fall 2010 to believing that the Federal Reserve won't make a move until 2011. Bloomberg's regular poll of economists showed that, as of May 10, the median forecast called for a very modest 0.25-percentage-point increase in interest rates to 0.5% by the end of 2010. That's down from the April 29 median forecast of a 0.75% target rate by the year's end.
Why the change? The thinking is that with the euro debt crisis causing growth in the eurozone economies to slow to 1% or less in 2010, the Fed will be extremely reluctant to slow U.S. growth with interest-rate increases and risk stalling the U.S. economic recovery.
The reversal in interest rates has rippled out across the U.S. economy.
For example, mortgage rates have fallen almost as fast as Treasury yields. On May 18, the interest rate for 30-year fixed mortgages was 4.70%, down from 4.79% on May 11, according to Zillow Mortgage Marketplace. The interest rate on a 30-year mortgage hadn't been that low since December.
