The Anchor Gets Heavier — and Your Wealth is at Risk!

by Mike Larson

In Germany, it's called an "anker." In France, it's the "ancre." In Spain, it's an "ancla." But no matter how you spell it or pronounce it, the anchor that is Europe's economy just keeps getting heavier! Hardly a day goes by without yet another dismal report from our friends across the pond ... Germany? Industrial production just collapsed 4 percent in August, the biggest drop since January 2009! Plus, business confidence recently slumped to the lowest level in a year and a half. France? Its benchmark service sector index just dropped to 48.4, falling firmly into contraction territory. Businesses are the most pessimistic they've been since last August, while a key gauge of consumer spending just sank to an 18-month low. Spain? Retail sales slumped 0.9 percent year-over-year in August, the worst decline since last summer. The ongoing real estate slump there just drove house prices down another 2.7 percent in the second quarter. That was the 23rd straight quarter in a row of declines! The International Monetary Fund is headed by a French woman, Christine Lagarde. So she has a front-row seat to the economic meltdown in Europe. No wonder the IMF just cut its 2015 world economic forecast! The group now says Europe will barely grow 0.8 percent this year and 1.3 percent in 2015. Japan will expand only 0.8 percent next year, while China will grow 0.3 percent less next year than it will in 2014. The IMF upped its 2014 forecasts for U.S. economic growth. For all of our long-term problems, the U.S. looks like a shining beacon of hope by comparison. The IMF says our economy will grow 2.2 percent this year, faster than the 1.7 percent pace the group expected when it made its last forecast in July. For 2015, the IMF is expecting growth to accelerate to 3.1 percent. Why do I keep focusing on this issue? Maybe some of it is because I'll be doing a presentation on the global economy for our German Safe Money Report readers next month in Munich. But that's just a small part. The bigger reason is that here in the U.S., we face an absolutely critical question: Will Europe drag us down? Or will we lift Europe up? Just look at the huge divergence in performance between the most important European index, Germany's DAX, and our S&P 500. The DAX is now DOWN 2 percent year-to-date while the S&P is still up 8.9 percent. Factor in the depreciation of the euro against the dollar, and you can see that a U.S.-dollar based investor in the DAX has done even worse — losing 9.7 percent! Click for larger version Either the European bourses are going to get it together and start giving our stock market a helping hand, or we could get dragged kicking and screaming into the abyss! I've been relatively sanguine on the state of the U.S., but the longer this goes on, the more worried I'm getting. I've already taken some profits off the table and cut a bit of dead weight in the Safe Money model portfolio. Doing something similar in your own portfolios is probably a wise move. Then keep reading my Money and Markets updates so you know whether things are getting worse — and whether more action is warranted!