Europe Leaders Putting Cart Before Horse: Global Crisis To Resume

by: James A. Kostohryz
When I was a kid, I used to love to visit veterans in order to listen to their war stories (I still do). One anecdote that has come to mind as a result of the “Merkozy” telephone summit this past Sunday was that of a WWII veteran who told me of an experience of his while being held captive by the Germans as a prisoner of war.
This particular fellow was put in a special POW camp run by the Germans because he happened to speak fluent German. My friend told his captors that he - like many other Americans at that time - was the son of German immigrants. This was a lie since he was, in fact, the son of Czech immigrants. The Germans did not detect the prevarication and my friend managed to get himself assigned to a special camp. These camps had special status because it was believed that Germanic prisoners would be more useful to their captors due to the ease with which they could be ordered to perform various key tasks with relatively minimal supervision.
One day, my friend was ordered to prepare a large horse-drawn wagon carrying crucial supplies. He dutifully acknowledged the order in German. He then proceeded (with considerable skill) to securely hitch up the team of horses to the wagon in such a way that the horses’ heads were all facing the wagon.
When the German officer arrived for inspection prior to moving the supply line, he was not amused. Outraged, he exclaimed “dummkopf!”
The entire supply train was delayed by a few hours while the several men unraveled the grand mess that this fellow had made.
Fearing a possible death sentence for his chicanery, my friend managed to escape with a lighter sentence by claiming that he had done the best that he could but that that nobody had asked him if he was qualified to perform the task that he was assigned. He claimed that he was a plumber and had never hitched a horse to a wagon before. He offered as proof of his earnestness that he tried as best he could to tie all the knots so securely to the wagon that the horses could not escape. The German officer presiding over the proceeding called witnesses that confirmed how thoroughly and skillfully the horses had been tied to the wagon. The presiding officer concluded that it was highly unlikely that somebody could intentionally do something that was so incredibly stupid so very well.
After spending a few days in solitary confinement, my “plumber” friend was assigned to fix latrines for the remainder of the war.
Merkozy Putting The Cart Before The Horse
Banks all over Europe – from Banco Santander (STD) to Deutsche Bank (NYSE:DB) to ING (NYSE:ING) - are in trouble and need to be re-capitalized.
German Chancellor Angela Merkel and French President Nicolas Sarkozy proclaimed on Sunday that European banks would not be abandoned and would be recapitalized, if necessary.
Aside from the fact it merely acknowledges the obvious (it is obvious that Europeans cannot allow their banking system to fail), the Merkozy statement seems to approach the problem in a manner that is exactly backwards.
The European banking system is in trouble in the first instance due to prospective losses deriving from the eventual need to write-down losses on European sovereign bonds.
In other words, the prospective undercapitalization of European banks is a mere symptom of a much broader systemic problem; the proximate cause of banking sector problems in Europe is the crisis of confidence that has spread from the sovereign debt of Greece to the sovereign bonds of countries such as Spain and Italy.
A program that tries do plug holes in the balance sheets of European banks without addressing the source that has caused these holes and that can at any moment create even more gaping craters is, with all due respect, “putting the cart before the horse.”
Despite enormous German thick-headedness, the problems facing European sovereign bond markets cannot be solved with smoke and mirrors. Without radical solutions such as euro bonds or leveraging the EFSF to backstop European sovereign debt, the crisis that threatens the euro will resume with a vengeance.
I just wonder what Sarkozy and Merkel will say when the market sees through this latest bit of buffoonery and the European crisis resumes in all earnestness.
My best guess is that Merkozy and company will probably steal a page from my friend’s playbook and say that they are merely humble public servants doing the best they can, but that nobody told them how to solve sovereign debt crises when they studied for their civil service exams.
Their calculus, in this case, will be that the public will be lenient on dummkopf politicians playing the role of mere innocents in the face of rapacious bond vultures.
Which begs a question: What will the voters relegate Sarkozy and Merkel to do next?
One may legitimately wonder if it will be anything so useful as fixing latrines.
In all events, the problems in Europe that have been helping to drive global markets downward are nowhere near being fixed. The core issue of backstopping the sovereign debt of Spain and Italy remains unresolved. Once the current technically driven relief rally has been exhausted, U.S. equity markets (^GSPC, ^DJIA, ^IXIC, ^NDX) will resume their major downtrend as this issue and various others that have been weighing on markets reassert themselves.
U.S. stocks (SPY, DIA, QQQ) generally, are reasonably priced. However, for reasons that I have detailed fully in previous articles, I believe that stocks such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), AT&T (NYSE:T), Verizon (NYSE:VZ), Pepsi (NYSE:PEP) and Goldman Sachs (NYSE:GS) will ultimately be available for purchase at prices 15%-25% below current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.