That’s right, el muro de la preocupación, the wall of worry, is back and Madrid’s problems are now your problem.

“We’re reminded once again that what was done was largely to defer or kick the can down the road, rather than necessarily cure the economic woes in the peripheral countries of Europe,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott in the attached video clip. “I think it’s only a return of what we should have been seeing over the last several months but have had a reprieve.”

For all the supposed “progress” that was made this year at the hand of the European Central Bank’s intervention known as LTRO (long term refinancing operations), we have just reset the clocks back to December; the barometer being the yield on the Spanish 10-year bond that is closing in on 6% and a 6-month high, as well as a renewed appetite for Swiss Francs (CHF/EUR) as a haven from an uncertain Euro.

“Their (Spain’s) yields right now are the canary in the coal mine for me to see what investors are thinking about relative to the prospects of them becoming the new Greece,” says Luschini, who argues that the stiff headwinds facing Europe never really went away.

As much as he is alarmed by this retreat, Luschini says he does not think we will see a repeat of the near panic conditions of 2011 where we were “skirting with financial Armageddon,” but who knows.

At issue is whether Spain’s fiscal and economic shortcomings are indicative of a larger slowdown in Europe, rather than the ”mild recession” that is already ”baked in” to the markets.

If things are indeed deteriorating, he says the most significant threat to the U.S. economy is probably more macro, or indirect, via a downtick in global growth lead by China due to a reduction of its exports to Europe.

Anybody know how to say, déjà vous in Spanish?

Granted, rising commodity prices have helped set off a virtuous cycle of credit expansion and asset appreciation, lending internal momentum to the region’s growth. Despite it, Latin America hasn’t decoupled from the West’s woes. Witness how the region’s equity markets have cratered during the eurozone crisis. If anything, Brazilian stocks behave like turbocharged exposure to world markets in part, thanks to a vibrant carry trade (in addition to the Chinese export link we mentioned). Even after recent cuts in Brazil’s benchmark SELIC interest rate to under 10%, Brazilian bonds are among the highest yielding in the world. The high rates have attracted a lot of foreign capital from low-yielding markets, elevating the real to one of the priciest currencies on a purchasing-power parity basis. Dents to Brazil’s economic outlook will hurt equities and spur further rate cuts, which in turn will hurt the real and wallop equities again.

Beyond these considerations, Latin America seems attractive because fundamental reforms that have led to macroeconomic stability and relatively stable public debt. However, an investment thesis can’t rest on a simplistic narrative that a rampant growth will take equity investors on a ride to the stratosphere. History suggests high growth may be a curse for investors.

Driving Factors
The bull case for Latin America rests on several trends pointing to strong future growth for the region. First is China’s rise. The expectation is that the hundreds of millions of Chinese entering the middle class will continue to vacuum up the world’s scarce natural resources, providing a windfall for commodity-exporting countries like Brazil. The second is improved economic management. Investors expect Latin America’s public debt ratios to fall and its central banks to maintain and buttress the hard-worn credibility they’ve earned. The market hopes Latin America will avoid the debt crises and inflation that have wracked it in the past. (There have been at least two in the past few decades.) The third leg rests on demography. Europe, the United States, and even China are on the cusp of a rapid graying, suffering a demographic penalty–a problem compounded by massive welfare promised to the elderly. Latin America, on the other hand, is enjoying a demographic dividend as its young population enters the workforce and accumulates human capital. Finally, many expect pre-sal, or pre-salt, oil deposits to turn Brazil into a major oil exporter. According to The Economist, Brazil’s Tupi oil field, reckoned to contain between 5 billion to 8 billion barrels, is the second-largest discovery in two decades; many more may come.

Then again, if you believe in mean reversion, Latin America may give you pause. The S&P Latin America 40 Index returned 21.7% annualized for the period 2001 to 2010, putting it among the decade’s best-performing asset classes. This wasn’t just a growth story, but one of redemption. In the early 2000s, Latin America was an economic and political basket case. Brazil’s exchange rate and stock market had collapsed; the government was broke. The International Monetary Fund had to bail out both Brazil and Argentina within a year of each other. Despite Latin America’s steady strides toward fiscal health and well-diversified economic growth, those risks never disappeared. They came to the fore during the financial crisis when the Latin American stock market lost almost 60% in six months. The high returns investors earned in the past were in part compensation for buying a beaten-down, unloved asset class. Latin America looks a lot healthier now, and investors have bid up its equity prices. Don’t bank on the region’s stock market to repeat its hot run.

We say this despite Latin America’s rosy growth prospects. The bulls argue strong economic growth will translate to strong equity returns. But stock performance and GDP growth have been uncorrelated throughout the 20th century. Emerging-markets recent run of fantastic equity returns and economic growth haven’t upended this counterintuitive relationship. From 1999 to 2007, GDP growth and stock market performance among 21 emerging markets had a correlation of negative 0.30. Investors do a good job of anticipating and impounding future growth into current prices. In fact, they have tended to pay too dear a price for growth.

Bad debt that has scuppered emerging markets in the past may do so again. Latin America has at least twice in the past few decades defaulted or inflated its way out of them. Bulls point to stable or declining public-debt-to-GDP ratios. But leverage has shifted to the private sector. According to Brazil’s central bank, as of the end of September 2011, the household-debt-to-yearly income ratio has doubled to 42% over the past five years. And even if Latin America remains a paragon of fiscal prudence, the region’s balance sheets can deteriorate if China’s debt-driven infrastructure boom pops and takes down with it commodity prices. Of course, this time may be different. We doubt it.

How to Access the Market?
IShares S&P Latin America 40 Index(ILF) is any easy, liquid, and inexpensive fund that provides access to this market. The fund tracks the S&P Latin America 40 Index, a curated collection of 40 stocks domiciled in Brazil, Mexico, Chile, and Peru. Like many S&P indexes, a committee considers a variety of factors when selecting stocks. Investors need not fret much over underrepresentation. The stocks are market-weighted and replicate the sector and country weightings of the Latin American stock market. Many of the companies are among the region’s dominant players. For example, America Movil(AMX) controls much of the Latin America wireless market and 90% of Mexico’s landlines. Vale(VALE) is the world’s largest iron ore and nickel miner. Our analysts think many of the ETF’s holdings have economic moats, by dint of scale or regulatory barriers.

The fund levies a 0.50% expense ratio, a steep charge for a small basket of liquid stocks.

Like almost every iShares ETF, the fund engages in securities lending and returns 65% of the resulting income to the fund’s shareholders. In the past fiscal year, ended March 31, 2011, ILF earned enough securities-lending revenue to offset about 7 basis points of the expense ratio. The practice introduces some counterparty and collateral reinvestment risk, but they should be de minimis, provided iShares sticks to conservative industry practices.

Rogers has been a critic of the Fed’s quantitative easing programs and artificially low interest rates, pointing to the latter as something akin to QE3 in drag.

“They’re lying to us,” he says of the Fed. “One reason the markets are holding up so well is that they are printing money as fast as they can.”

As asserted on Breakout regularly, the Federal Reserve is operating in an almost complete leadership void due to an unprecedented level of gridlock among the the elected politicians charged with setting fiscal policy. Unless and until the public acts on their many vows to “throw the bums out” of D.C. the Fed will be free, indeed forced, to act alone in regards to doing something to change our economic condition.

In a pyrrhic victory for America, Rogers believes things will eventually get so bad that Americans will finally vote for real change and economic progress. Alas, the measures he feels are needed to cure our economy are so harsh that those same officials will also get tossed out when voters realize just how harsh the road back to prosperity is.

Regardless of the necessary suffering, spending cuts are needed in order to save the most fiscally responsible citizens, those whose savings are funding this disaster.

“What the Federal Reserve is doing now is ruining an entire class of investors,” says Rogers. By forcing rates down and keeping the economy on a flatline, he believes the Fed could cause another lost generation of investments. Suffice it to say, vaporizing those who faithfully accumulated savings over the years is no way to restore confidence in our financial markets.

Rogers isn’t simply a disgruntled American patriot, he’s an investor with a legendary record of success. That being the case, and having established what the depths of suffering the world is facing now, the obvious question is where Rogers is putting his money to avoid or even profit from the pain.

“I’m long commodities and currencies; I’m short emerging market stocks, U.S. technology stocks, and I’m short European stocks,” Rogers tells me after pronouncing himself a terrible market timer (author’s note: He’s nothing of the sort). His logic behind the portfolio is that he wins if the economy turns up due to commodity scarcity. And if the economy remains weak, Rogers’ short positions will more than offset his long positions.

As for gold, an investment he’s been holding for years, Rogers has a mixed view.

“Gold has been up 11 years in a row,” he says, adding it’s “very unusual for any asset in world history and I’d expect the correction to continue.” That said, he’s not selling any of his gold and would look to buy weakness, depending on the global situation.

He’s long select commodities and currencies, short Europe, tech and emerging markets. Is Rogers off base or is he underestimating the ability of the Fed to turn this thing around? Let us know what you think in the comment section below or visit our Facebook page.