Beware Dead Cats and Eurocrats

11/28/2011 10:49 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Rumors out of Europe are tempting investors to buy into the next action deadline. Resist the urge, writes senior editor Igor Greenwald.

This is what bear-market rallies look and feel like, even if we’re not quite in an official bear market. They start with a rumor, blow up into a short-covering crush, and force all the sideline sitters to ask whether they might be missing something vital.

In truth, all that’s happened is that, from the highs of November 15 through Friday, the S&P 500 lost more than 8% in a straight line. Markets this ugly often enjoy spectacular bounces before resuming their declines.

That’s a more plausible excuse than the initial reports of strong Black Friday sales, because consumers have been shopping all along.

Nor can we credit the outlandish rumor circulating Sunday that Italy might soon get bailed out by the International Monetary Fund to the tune of €400 billion to €600 billion ($534 billion to $801 billion). The lower bound of that fantasy is 30% above the IMF’s current global lending capacity. The report in Italy’s La Stampa was quickly debunked.

There were encouraging developments in Europe over the weekend, on the margins of the financial crash imperiling global growth.

Talk of a closer fiscal union from Germany and France has shifted into panicked overdrive, suggesting Berlin wants a new agreement in place by the latest leadership summit on December 9. New safeguards against overspending might help Germany relent in its opposition to the issuance of Eurobonds, and prod the European Central Bank into more aggressive purchases of Italian and Spanish sovereign debt.

This is a necessity, because despite the stock market’s bounce, yields on Italian debt continue to hover above 7%, suggesting the bond market isn’t buying the optimism outbreak. And that’s the market that matters most.

This is depressing territory. The worse things get, the greater the temptation to infer that something will be done about it, and soon. When there’s serious discussion in the Financial Times about the Eurozone having ten days “at most” to survive, perhaps the situation is dire enough.

We’ve all been there before, of course, most recently a month ago. Are we to believe this is the real deal because Europe’s banking crisis has since evolved from terrible to intolerable?

Will December 9 prove the watershed, reassuring European sovereigns and banks that they’ll be able to finance themselves next year? The odds are against it.

And nothing currently being contemplated in European capitals addresses the root causes of the crisis, which is that Italy and Spain need a different currency from Germany, in the absence of huge in politically unacceptable fiscal transfers.

Until that changes, likely with the breakup of the Eurozone, Europe seems destined to lurch from one emergency to the next. Meanwhile, the global recovery is on the ropes. Chances are that Europe’s financial panic hasn’t yet made itself fully felt.

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