Faux Crisis

It is tough being a short these days.  Every other person is short because they buy into the European crisis rhetoric and that's somehow going to crash the markets like Lehman Brothers.  The Europeans don't have a serious crisis.  Greece does, and maybe Portugal and Ireland.  But they can go bust and it will be like Argentina defaulting.  No one would care.  Sure, it could cause short term panic for the brainless who think contagion will happen because they see CDS spreads blowing out fearing Europe is on the verge of a 2008 repeat.  But crises are born from excess.  I don't see much excess over the past few years in Europe.  They are cutting back government spending and taking their medicine.  You get the short term result:  a recession which cause credit spreads to widen, earnings to lag, and a breeding ground for fear mongers.  Italy and Spain are solvent.  With the ECB providing a backstop, there will be no liquidity crisis for those countries.

The Europeans aren't so willing to inflate their way out of this problem because Germany has the most power, and they are the most hawkish country in the world.  So this is what you get:  a weak economy, with a currency that doesn't want to go down much even with the world betting against it.  If this really was a serious crisis, do you think the S&P would be down just 3% on the year?  And much higher than 1 year ago?  One year from now, the euro will be much higher vs. the dollar, and equities and precious metals will be higher. What may end up being the weakest are those commodities most sensitive to China, like industrial metals like copper, nickel, tin, iron, etc.  The real estate bubble bursting in China will have negative ramifications for commodity exporters, like Brazil and Australia, but it shouldn't really have much impact on the US or Europe, who don't have that big of a market for exports to China.