Wednesday, 27 Mar 2013 08:48 PM

By Kathleen Walter and Dan Weil

Cyprus is too small a nation for its crisis to directly affect the United States, says David Sterman, senior market analyst at StreetAuthority.com. But it could spread to bigger countries in Europe, which then could raise a threat to the United States, he tells Newsmax TV in an exclusive interview.

“The real threat to the U.S. is concern that things like Cyprus start to impact bigger and bigger dominoes in Europe, whether it’s Italy or Spain, and messes up all the financing mechanisms we’re desperately trying to arrange to keep things moving forward there,” Sterman says.

“So it’s really what Cyprus means for Europe and what Europe means for the U.S.”


The issues for Cyprus itself appear to be largely resolved. “But the broader issue is still not fixed,” Sterman says. “And until Europe can really stand on its own two legs without all these kind of mechanisms in place, Europe is always going to be a potential big risk for us.”

Things get tricky when governments are choosing winners and losers in a financial crisis, like Cyprus did, he says. “The most important thing that European policymakers can do is what’s best for the system and not necessarily for individuals.”

By enforcing losses on depositors and creditors, “you start to remove confidence in people providing new lending money or companies to lend,” Sterman says.

“So they’re really in uncharted waters in terms of how they respond to these crises, hoping that the wrong lessons don’t get learned and that they don’t sap any of the confidence that may be starting to develop throughout Europe.”

Sterman agrees with Federal Reserve Chairman Ben Bernanke’s contention that the central bank’s massive easing plan is helping economies overseas as well as the United States.

“Capital is fungible and our ability to hammer down our borrowing costs through aggressive Fed action sets off a chain reaction,” Sterman says. “It’s why, for example, even Italy and Spain, with all their problems, still are back to fairly normal borrowing rates.”

Meanwhile, he says the U.S. stock market, still hovering near record highs, is headed for a tumble. But that’s not due to any weakness in the economy.

“I’m actually increasingly bullish on the U.S. economy,” Sterman says. “We really are starting to see an upturn in housing. U.S. manufacturing is going to be one of the great stories the next three or four years.”

So what makes Wall Street vulnerable?

“This market is rising for the wrong reasons,” Sterman says. “It’s related to short-covering; it’s from people taking on too much margin debt; it’s from the Fed’s liquidity, which will eventually run out; it’s from these ultra-low interest rates, which will eventually rise.”

A correction is almost inevitable this year, he says.

If you’re going to buy stocks in the face of that correction, favor industrial issues, Sterman says.

“If you look out two or three years, the renaissance of U.S. manufacturing is a story that’s just beginning to be understood by people.”

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