Europe Knows Its History

 | Oct 21, 2011 | 10:58 AM EDT
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The smart money has wanted to short this market every single step of the way. It has been as if the only badge of honor is to be short and the reason is clear: Europe is too big and MUST fail.

In other words there truly is no plan big enough and no entity large enough to rescue banks from themselves. The European banks, unlike the American ones, are so huge and so intertwined with the fortunes of sovereign debt that anyone who even thinks there could be a solution that isn't catastrophic is regarded as a lightweight.

After all, the banks collectively are three times as large as the gross domestic product of Europe compared with only about 70% for ours, and that may be understating the size of the European entities. Even if China, the United States and the IMF got involved, there isn't enough money to bail them out.

Of course, they could be nationalized and that would mean the backstop countries would all have their credit ratings downgraded and these are meant to be sacrosanct.

I have no doubt that the bears are smarter than I will ever be. I have no doubt that they are right about the scale and size of the issue.

But I wonder if they understand the history of the continent. I wonder if they don't overstate the need for these countries to protect their AAA ratings and should be more focused on the idea that the countries are all about having peace in the end and not descending into the brutal wars that seem like they were just yesterday.

In the end, they will sacrifice their ratings and their standards of living and start over if they have to. So the idea that there is no solution other than to bring the world down is not going to hold water.

Of course, the rap is also that they have to bring the world down with them that there is no way we won't have a worse recession than 2007-2008 and the understanding, I think, is that the bears believe that even the Depression will be exceeded for its pain this time.

Again, I think that represents a keen misunderstanding of history. No, the problem can't be cordoned. But yes, any recession that brought down GM (GM), Merrill, Fannie and Freddie, Wachovia, Washington Mutual, Bear and Lehman and AIG (AIG) -- include Citigroup (C) if you want -- is one that has pretty much left little in its wake except a lot of much stronger institutions, and there is another tier of banks, notably of the BBT (BBT) and USB (USB) variety, that stand ready to replace the current ones if they fail.

I understand the desire to short copper and aluminum off this imminent European collapse. I do not understand how they can also not be short oil. Maybe they are and that's a pesky short.

I do not understand how they think that there can never be a way out of anything.

I also do not understand how they can't see that these countries experienced the rise of Hitler and Stalin and you have to give them that they must have learned something about how economics can lead to social unrest and dictatorships and genocide, so a solution will have to leave the fabric intact even if the fabric is more poly than cotton when we are through with this era.

Just some thoughts on why these markets may be more resilient than people think not just because Honeywell (HON) has seen no slowdown and McDonald's (MCD) has seen an acceleration but because history says that Weimar inflation  and German deflation breeds Nazi Germany so maybe, just maybe, it's worth sacrificing a triple-A rating to keep history from repeating itself.

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