EURO MADNESS

By Bondsquawk:

Host of CNBC’s Mad Money, Jim Cramer thinks that the European Union’s debt troubles is actually good for the United States.

What?!?

His blog recap states:

What’s bad for the European Union, Cramer said during Monday’s Stop Trading!, may be good for the US.  He thinks the EU’s debt problems have helped fuel the rally we’ve seen in the American markets.

“This is a gigantic movement of capital out of Europe to the United States,” Cramer said.

If we look at 2008, the Dollar, which illustrates a demand for liquidity and flows into and out of the U.S., rallied shortly after the collapse of Lehman Brothers. Despite this and contrary to Cramer’s premise, the S&P 500 continued to collapse, which sent bond yields to historical lows.  Sure, money flows and low bond yields are bullish for stocks but that scenario is favorable over the long term.  Low borrowing costs spurs investment, which in turn increases profitability.  What we are dealing with is the here and now.

2008 – The Dollar Index, S&P 500, and 10-Year Treasury Yields

Crisis such as Long Term Capital Management, which was triggered by the Russian default, and the Great Recession, which was triggered by the smaller (in relation to the overall mortgage market) sub-prime sector, demonstrate that these types of problems are not caught in a vacuum and are not compartmentalized. In an age of complex derivatives and globalization, we have no idea on how far down the rabbit hole goes as commerce is interlinked across companies and borders.  One blowup here could send ripple effects around the world.  Until reform includes regulation that spans not just companies and industries but across the global landscape, we will continue to see events like this.

Now, the U.S. equity markets could ultimately, shrug this off like it has done in the past few weeks and rally to another age of prosperity.  I am all for it but let’s call it the way it is.  This rally in stocks and other riskier assets is not a result of investors fleeing.  Fiscal stimulus and “free” money, which has fueled positive earnings growth in the short term, has brought us back from the brink of financial and economic disaster.  The rule of ‘Don’t Fight the Fed’ certainly applied this past year.  However, the laws of economics and market psychology may start to dominate going forward.  The viability of solving debt problems with more debt is still on the table and will be challenged in the coming months if not years.

The bottom line is that the market does not like uncertainty.  The debt problems of Greece is catching on to other debt-heavy developed countries and this should be a concern for everyone. It is practically “mad” to call it otherwise.