“Europe has the capacity to manage through this,” Geithner said in an interview on Bloomberg Television’s “Political Capital With Al Hunt,” set to air this weekend. “And I think they will.

Haven’t we heard all this before? Geithner’s predecessor, Hank Paulson, expressed full confidence in the US financial system about two weeks before the bottom fell out with the demise of Lehman Brothers. And of course, President George Bush used to brag about the increasing numbers of Americans that were purchasing homes, while failing to mention that many of the homes were being financed by liar loans to people that absolutely lacked the ability to repay.

More recently, President Obama’s financial team, and the President himself, have been talking about how the economy is turning the corner and that soon enough happy days will be here again. As Treasury Secretary, Timothy Geithner, has been one of the Obama’s administrations chief cheerleaders.

There appears to be only one honest man, former Federal Reserve Bank Chairman Paul Volker, giving advice to the present administration. When asked if he agreed with Obama economic adviser Paul Volcker that there is a risk of “disintegration” of the euro, cheerleader Tim Geithner said Europe is “committed to fix this problem.”

Of course it is extremely difficult for politicians to acknowledge and to speak truthfully about problems that confront their countries. No politician anywhere wishes to appear that any situation is beyond their ability to remedy. That is one inherent weakness in the democratic form of government. No politician wants to say anything in public that the voters don’t want to hear. After all, retaining their elevated positions in life is their number one priority. Most politicians probably sincerely believe that what is best for them is also best for their nation’s interest. In general, human beings are experts at rationalizing and justifying their own actions and politicians are the foremost experts at this all too human behavior.

Politicians are unwilling to speak truthfully about difficult situations that would require sacrifice and frugality on the part of voters in order to solve the problems. Politicians seem to prefer to engage in a confidence game whereby no real solutions are offered but speechs proliferate that they have taken appropriate action and that things will soon get better. The belief for politicians seems to be that if only we are confident enough that difficult situations will improve they will in fact improve. That is, with enough confidence problems will be solved, even if we don’t know exactly what caused the problems in the first place or refuse to acknowledge the source of the problem.

Therefore, we have Timothy Geithner responding to skepticism in financial markets about Europe’s efforts to tackle its debt by saying “it’s very natural that people want to see what Europe does. By acting, they will have the chance to earn people’s confidence over time.”

What Obama, Geithner, Summers, and the other administration cheerleaders probably don’t realize is that time is fast running out. The financial bailouts of the last two years have in affect transferred trillions of dollars of bad debt from the private sector, think bank bailout loans to Goldman Sachs, AIG, Citigroup, and others, to the public sector.

Governments around the world have taken on trillions of dollars of additional debt in an effort to revitalize their economies. The debt burdens of nations such as Greece, Spain, Portugal, Ireland, and Italy have probably become unmanageable. In our interconnected world sovereign debt issues are now spreading from these nations to effect stock markets and financial markets in the United States, the UK, Japan, and elsewhere.

Politicians around the world are strong believers in the “kick the can down the road” method of governing and managing economies. However, time is rapidly running out for the politicians favorite game. Not only are they running out of time but they are running out of road. Nations cannot save each other by simply creating Fiat currencies and loaning what passes for money to each other. The idea that you can solve problems of excessive debt by creating additional debt is ludicrous.

In the end, sovereign debt issues can only be solved by the reduction of debt. Nations must reduce expenses while increasing revenues. The problem for politicians and for the citizens of many nations around the world is that the austerity measures necessary to reduce unmanageable debt loads will cause a deflationary environment that will lead to tremendous hardships.

Certainly, it is difficult for any politician to speak of increasing taxes at a time when many people are already struggling just to stay alive. There is the fear, absolutely justified, that austerity measures, including the increase of taxes, will lead to civil unrest and disorder. This has already occurred in Greece and will likely spread throughout Europe and beyond as government cutbacks in expenses and services become more pronounced.

The more vocal that confidence cheerleaders like Timothy Geithner become the more you can be assured that we have entered the end game. Sovereign debt issues are measured in the trillions of dollars. I see no way that the issues can be satisfactorily resolved without going through a long term period of depression, hardship, and despair as the implosion of the Mount Everest of debt leads to a massive scale of bankruptcies and loan defaults, not only among individuals and corporations but among sovereign nations.

I don’t know about you but the more often US Secretary of Treasury, Timothy Geithner, expresses full confidence that the sovereign debt issues challenging Europe and much of the developed world are manageable the more nervous I become. Surely, the sovereign debt issue end game is upon us.

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While the stock market has so far largely ignored the ramifications of a sovereign default of Greek debt probably that lack of a reaction was due to investors thinking that a restructuring (default) was an extremely remote possibility. However, with Thursday’s disclosure that Greece’s debt burden is even worse than previously estimated the unthinkable has simply become thinkable. Revised figures Thursday from Eurostat, the European Union’s statistics agency, underlined just what a deep hole Greece is in.

Total government debt was €273 billion, or $365 billion, at the end of 2009, or 115 percent of annual gross domestic product. Interest alone could come to €97 billion over the next five years, estimates Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, New York. There is just no way Greece can manage that excessive debt burden, he and analysts say, without far more massive aid than the €30 billion that other European Union members have pledged. Yet political resistance within the eurozone, especially in Germany, is growing to even that relatively modest rescue plan.

While politicians hate to even mention the possibility of default, and probably will not do so until the bitter end, the situation in Greece without a doubt is grim indeed. A restructuring and haircut for Greek bondholders may be inevitable as Greece can not likely make additional severe reductions in its spending without risking complete chaos, disorder, and even anarchy among its population.

Most economists and politicians still regard a full-fledged, Argentina-style default, with investors losing over half their money, as too scary to contemplate. Even a so-called haircut, in which creditors absorb a relatively modest reduction in the face value of Greek bonds, could scare away bond investors and prompt a sell-off of Portuguese and Spanish debt. No doubt that in the event of a default the Greek stock market would experience an extreme selloff as interest rates in Greece would soar.

The Greek sovereign debt issue really is only the tip of the iceberg when it comes to excessive debt burdens taken on by largely Western nations. The astronomical increase in the debt load by the United States and the United Kingdom will likely take center stage within a year or two and make the crises in Greece look minor by comparison.

With the US stock market, as measured by the Dow Jones industrial averages, already technically overextended to the upside in my opinion it is currently quite risky to be outright long in US stocks. While it is entirely possible that an over extended stock market can become even more overextended, a triggering event, which could be caused by a further deterioration in the Greek sovereign debt issue that spreads to Portugal and Spain, could quickly turn an overextended market around and send it into a violent tailspin.

Greek and other sovereign debt issues are much like water that is held behind a dam that is destined to fail due to increased pressure from water levels raising (think debt levels) to beyond capacity. While at the moment everything may seem fine to those living in the valley below the dam once the dam fails a fine condition will turn into one of catastrophe in an extremely short time period.

In my opinion, this is not the time to chase after stock markets, even those that are driving you mad as they seem to rise almost every day. Greek sovereign debt issue pressure is building and threatens contagion to other countries, most certainly to Spain and Portugal but also in time to the United States and the United Kingdom. Contagion is not only likely but certain to a high degree. At some point in the near future bond holders of sovereign debt will realize that they are living in a valley behind a dam that is sure to fail. Greece is not the only nation that more than likely will eventually be forced to restructure debt and give substantial haircuts to its creditors.

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Many traders seem to be convinced that the worst of the financial downturn is behind us. They apparently are greatly influenced by the constant cheerleading of Team Obama administration officials. The administration seems to think that if only enough confidence can be generated about our financial future then our financial future is assured. However, in reality little if anything has been done to solve the problems of excessive debt and the reckless use of leverage that are largely responsible for the financial meltdown of 2008.

Many traders and administration officials, who really should know better, continue to ignore the unprecedented surge in government debt, the still shaky condition of the residential housing market, serious deterioration in the commercial real estate market, and sovereign debt issues that are only getting worse as 2010 goes by. Then the poor American consumer is pretty well tapped out by the combination of declining wages, the continuing high level of unemployment, and the burden of attempting to service a high level of debt with a declining level of wages.

When you toss in the truly terrifying condition of state and municipalities finances nationwide, especially in states like California, Arizona, and Ohio, the propect of not only the bear market resuming with vigor but of a total financial disaster becomes all too real.

It is highly likely that the bear market will resume this month or at the very least a 10% to 20% correction getting underway. With so many market traders and talking heads once again so bullish the decline, should it take place, will likely be swift and vicious. It appears to be that this is no time to be complacent about being long stocks.

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Thus far, of course, Prechter’s forecast has not been realized as the current market rally has extended to above the 11,100 point level on the Dow. This move has taken the market averages to near the upper level of the rally range forecast by Prechter which is about Dow 11,300. He therefore has not modified his forecast and thinks that an over extended market rally is near a reversal point and that in time much lower prices will be realized as the bear market resumes.

This forecast differs markedly from that of most market analysts and talking head gurus who in general are talking about the resumption of a bull market. In fact, the glowing bullish forecasts have reached the level and exuberance that prevailed immediately prior to the sharp fall from about the 14,000 Dow level. However, as any decent market technician can tell you the current market is overextended by any indicator. A good technician would have to tell you that at the very least a correction of 10 to 20% is most likely from current levels. Even the famous investor Jim Rogers is forecasting a sharp 20% correction, perhaps far more.

Robert Prechter takes a much more dismal view of market conditions. He feels that deflationary forces are taking hold which will completely overpower the governments of the world effort’s to reinflate markets. In his view, and mine, the deleveraging process still has far to go before a new bull market begins from much lower levels. Robert Prechter is sticking with his grand super cycle deflation forecast and in fact does not predict a bottom until 2016. Now that is a grim forecast.

His forecast certainly seems possible when one considers the unfinished business of debt liquidation and delevering that the US, UK, Spanish, Portugal, Iceland, Dubai, Greece, Italian, and other economies face over coming months and years. While over the past few months Iceland, Dubai, and Greece have been at the forefront of the sovereign debt issue, those troubles pale compared to future problems that will be experienced by the UK and US as they struggle to finance and reduce their tremendous debt burdens. The current government acceleration of bread and circuses to the masses, adding to the debt burden all the way, is sure to end badly.

The liquidation of debt, efforts to prevent default, and in some cases eventual default, are certainly deflationary in nature. Greece is a good current example of deflation forces at work as the Greek government has been forced to cut back on public sector spending, including cuts in pensions for government workers as well as reductions in salaries, as it struggles to reduce government expenditures. A large number of workers confronted with an immediate 10 to 20% reduction in income will quickly result in a hit to Greece’s GDP output. When people have less income they are forced to cut back on discretionary spending. They also become very angry and civil disorder becomes common. That is not good for any economy.

Deflationary forces are becoming ever more evident within the US economy as excessive debt burdens at the state and local level along with reductions in income as the depression bites into tax receipts are beginning to force cutbacks in public employment and services. In some states, budget considerations and constraints are so severe that even essential public services, such as police and fire protection and education are being sharply cut back. Only the federal government, which has the ability to create what is called money from thin air, is still expanding the federal government payroll and that is creating even more debt. Any substantial increases in interest rates from here will cause serious problems for the United States.

It would therefore seem, that while Robert Prechter is making his stock market forecast based upon his understanding of Elliott wave principles, there are powerful deflationary forces at work that would seem to make his grand super cycle deflation forecast one that should be taken seriously.

Perhaps I should mention that Robert Prechter was correct in 1987 in forecasting a sharp market correction when most forecasters could only see smooth sailing ahead. The track record of his company, Elliott wave International, has been far better than most over an extended period of time. Perhaps you should at least consider that the stock market is overextended and is due for a sharp correction, and perhaps the swift downside action and revenge of an awakened big bad bear market.

The spending excesses and shameless cheer leading by the US government are only going to make matters worse.

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With the recent extreme movements in the market, traders and investors are focusing more and more on protecting capital than on achieving out-sized gains. I’ve found that by properly knowing the trend of the symbols in my portfolio and keeping on top of those moves, I’m able to protect capital and pull profits out of the market when I can as well as to cut losses on trades that I entered without being more careful with an analysis prior to taking a position. By using the analysis tool in the future I can eliminate making those low percentage of being winners trades.

Without a proper tool staying on top of market changes and momentum shifts often becomes overwhelming, especially if like me you’re watching a large number of symbols and open positions. One free tool that I utilize to help me keep on top of my portfolio is called Trend Analysis, from the team that runs MarketClub. Trend Analysis is a daily email analysis tool that gives me insight into exactly what my portfolio is doing.

Trend Analysis

The link above takes you to get your first symbol analyzed and from there you can easily add more symbols to get a daily update, which I find very helpful.

Again thanks go to the MarketClub team for making Trend Analysis available for no cost to us. Learn more about MarketClub here: MarketClub

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