Euro Hopes Are Good Enough for Markets

10/19/2011 6:30 am EST


Jim Jubak

Founder and Editor,

MoneyShow's Jim Jubak thinks it is curious that investors now seem to believe there really is a plan to stop the Euro debt problem from spreading...and they may soon be disappointed.

One of the things that’s been really puzzling about this market, the market that’s been going up, is why suddenly people are believing these vague general statements about things that are going to be done in the European Union, when before they were saying it’s just words.

What’s really interesting is that you sort of get—because we switch so much from fear to hope and then back and forth when you’re in a hope mode—stuff that wouldn’t move the markets up at all before, because it was too vague, suddenly works.

Let’s take a day like October 12, when we had a statement from European Commission President Jose Barroso splitting up the big six principles for solving the crisis. I was looking at them and going, well, I think we’ve said all this stuff before.

For example, the first one of what he calls a big roadmap, is decisive action on Greece. Ok, I think we can all agree that would be a good thing, but what is decisive action on Greece?

Well, it’s deciding that we’re going to do something that will remove all doubt that Greece is going to survive. Well, yes of course...but what are you going to do?

Or take No. 2, we’re going to complete the Euro-area intervention. That we’re going to somehow set up a mechanism that will make it possible to stop runs on Greece or Portugal or whatever. Yes, indeed, this is what we want to do, we’ve known this needs to be done for months, and we haven’t added a whole lot more detail.

Same thing goes with the big “agreement,” and I put that in air quotes, between French President Sarkozy and German Chancellor Merkel about how they’re going to put together a grand plan and announce it by October 23, in time for the G20 meeting on November 2 or 3, as I remember.

Ok, this suddenly has moved the market because hey, there’s going to be a grand plan. Well, it’s really kind of scary to realize that the reason they announced a grand plan was because there is no grand plan.

It’s kind of like saying to your spousal unit and your children and your assembled relatives, "I’m going to lose 20 pounds by Christmas," and you say it out loud because you don’t have any plan for doing it, it’s always been really hard to do, you’ve never succeeded in doing it, but the announcement itself is suppose to give you the discipline to get it done.

This is pretty much the same thing. The French and the Germans are not on the same page:

  • The French are largely worried about protecting their country’s AAA credit rating, which means they don’t want to put government money into their banks.

  • The Germans are pretty much convinced that what they need to do is make sure the banks are recapitalized, and the banks and the bank bondholders pay, and they want it done through national governments.

I don’t know how you get these minds to meet, but merely the fact that they said there was a plan and the current mood seems to be enough for this market.

If you think about it, what you really ought to do is regard October 23 as a crunch date. If you don’t have any sense that there is a real plan that’s going to make people feel good about it when it’s announced, this is going to be potential for disappointment.

So we may run up on the fumes of hope until October 23, but we really need to see something come out of this, not just another statement of six vague principles that form some kind of roadmap about getting things done that we know have needed to be done for months but we don’t have any mechanism for doing.

Related Reading:

A Ground View of Ireland
The Euro Is About to Get Killed
China Faces Its Own Debt Bomb

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