The global economy remains in a deleveraging theme worsened by the simultaneous contraction phase of the financial cycle and  weaker business cycle overlapping. This pattern of events is interrupted only temporarily  by injections of monetary stimulus. How to prevent 2013 in Europe from becoming like the 2008 meltdown in America should be the greatest nightmare of investors everywhere.

The double whammy of sovereign debt problems  together with bank debt problems is much tougher to solve than the Fed and the Treasury acting together as lender of first and last resort to American banks in 2008.   It’s far more complicated for Europe to come up with the equivalent of $7 trillion in  loans, investments and guarantees. For one thing  Italy has to  raise this year an additional amount of capital equal to  29% of its GDP to bolster its finances in 2013;  Spain  has to  raise  21% of its GDP. If the US had to raise 25% of its GDP in  one year that would be a matter of over $4 trillion.

In fact, the magnitude of the financing required could be well nigh impossible, according to former Treasury Secretary Larry Summers in a recent column “Avoiding a Global Catastrophe.”  After all, he points out,  the cost of rescuing the savings and loan industry  n the 1980s cost only 20% of the southwestern region’s GDP.  ” A euro-zone collapse would be an economic disaster that might define our era,” Summers warned.

Harvard historian Charles Maier takes European leaders to turn for “ debating their future with as diminished sense of history and the alternatives available to them. They should recall Secretary of State George C. Marshall’s grave warning upon returning from Germany in early 1947: ‘The patient is sinking while the doctors deliberate.’ Maier rightly sees the 1947 patient as the 2012 doctor– that is German Chancellor Angela Merkel. As an expert on German economic history, Maier has the right boldness to call for an assertive program of financial assistance– grants, guarantees,or loans– that will stabilize the rest of Europe in this crisis.

So let’s hope the reports of the European Stability Facility and the planned European Stability Mechanism will start buying Spanish and Italian bonds.  The G20 did promise  to “take all necessary policy measures to safeguard the integrity and stability of the area,” but there are no specifics worries Christopher Wood, author of the CLSA GREED & Fear weekly investment letter.

That’s just the latest in Europe. The reduced credit ratings of American banks could not come at a more ticklish time. To have the markets reckon that Morgan Stanley, Citigroup, BankAmerica and others are not as solid credits as they should be makes the entire global financial system appear to have the makings of a quagmire.  Even if the Spanish banks and the Italian banks  receive a financial bandaid– they still have to  pay the money back– and then could require yet another transfusion.

This backdrop is why I just don’t understand the stock market rallying at each apparent tiny step helping to stabilize the crisis, at least for a moment. So, I’m with Jeremy Grantham who can’t stand bonds or stocks, or PIMCO’s Bill Gross, who is avoiding stocks for low yielding Treasuries.  Whoever said “You need a 5 to 10 year view to buy stocks today” uttered a magnificent piece of wisdom. It’s a bloody quandry.

Add to that quandry the vacuum in monetary and fiscal policy in the U.S– and you have a recipe for  a great deal of profit making in the fall. Especially, as I believe, there will be little progress reversing the tax increases and the revenue  reductions that will arrive December 31. God– or somebody, save  us. I don’t be lieve the  investing public has come to terms withy this reality.

The U.S. economy is weaker than we expected. Philadelphia Fed industrial index was down  16.6, a lot worse than was expected. It’s another statistic that suggests the 2% growth projection is fading. Jobless claims are inching toward 400,000, and the price of commodities, the sensitive barometer of business  activity, are weakening.

The enigma of Europe worries me the most because I don’t see a rational unified solution to ensure stability.  CLSA’s Wood  emphasizes about how “the banking and sovereign problems  will become even more intertwined.”

Harvard economist Kenneth Rogoff bemoans the “toxic combination of public bank and external debt” threatening to “unhinge the eurozone.” He is anxious too about “how the United States will close its 8% -of-GDP government deficit over the long term.” There’s too much to worry about to be a bull for some time to come unless you’re buying for 2022.