I am pleased to see the market did not fly out of the gate to the downside this morning. I expected as much after yesterday’s 350 point turnabout. This is not to say the market won’t flip over and run for the door. It might, as a look at the DOW chart this morning suggests. The chart below reminds me of the Minarets, a somewhat famous series of sharp crags just above Mammoth Lakes in the Sierra Nevada Mountains.
The reason for the wild ride above is, of course, Spain and its banks. When I was over there, I talked to some international business folks and they told me that both investment and consumer money was flying out of the country. As it turns out, they were right. The Spanish banking system finds itself in quite the sour pickle because of a lack of capitalization. No worries, though, the EU will help, as it has lots of money from a well-capitalized “rescue” operation set up to deal with just such an event. The various “backstop” funds are now tapped, and the once unthinkable has happened – the 12th largest economy on the planet is being bailed out.
The irony here is two-fold. First, all the really smart people said this could never happen, that Spain was simply too big to bail out. That if it came to that, the whole euro currency project would collapse. In fact, that has been the prediction of those same really smart people for some three years now. Maybe it will happen, if Spain needs a whole lot more money, but at this point, the amount going to Spain is just about 10% of the total money available for such issues.
Second, as relative goes, the market does not seem to think this is a world ender, at least not this morning. I find that ironic because just yesterday, the market appeared to think Spain was a big deal. I say “appeared” because the anemic volume in yesterday’s trading points toward a reality – the big money is still waiting to see what will eventually happen with Spain, but, more importantly, what will happen with the EU and the euro currency project. That outcome is now in the hands of a woman whose political dynamic has shifted. Her once dominant coalition, the same one that helped her push through the crippling austerity, is crumbling, and her new reality is that if she wants to hold onto to her power, she will need to compromise her staunch austerity position, and that she is now doing. Look for money to be spread about, even if it means Germany will absorb some of the debt.
The sovereign debt crisis in Europe has crippled economies, nations and financial institutions and is threatening to destabilize global markets. Yet one woman may hold Europe’s — and the world’s — fate in her hands: German Chancellor Angela Merkel.
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