Europe Can Still Pull Through

 | Nov 11, 2011 | 11:34 AM EST
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The easiest thing to day is "Europe's a goner. A total Huis Clos, no-way-out, Sartre situation. But maybe we have the wrong book. Maybe it is Being and Nothingness, and with new leadership in Europe we are going toward the former.

Oh, and to get all poetic, maybe Yeats is being refuted right now: Maybe the center will hold and things won't fall apart.

Anyone who has said that Europe can work its way out of its jam without default of all of the major indebted countries and, of course, the major banks, has been viewed as a lightweight and a charlatan. Events have borne those judgments out.

But one of the things that made believing in Europe a sucker's game is that the former leadership in the ECB, Jean Claude Trichet, and the leadership in Italy and Greece were simply awful. Trichet, it is now obvious, never believed that Greece or Italy or Spain mattered. What mattered was fighting inflation. This man raised rates twice this year, even as it was obvious to almost everyone that Europe was slipping into a severe recession. He fought solutions, he underestimated the dangers. He was the worst man for the job.

Berlusconi got Italy in trouble. Why would he be the man for reform? Papandreou presided over the downfall of Greece. Why should we think that we need him at the helm? Instead, look what has happened. Both countries have put into place technocrats who understand the need for reform. They can work with Mario Draghi, the new central banker who immediately repudiated Trichet with a rate cut.

The International Monetary Fund has held back its cash, waiting for people to work with. They are getting them. The idea of sitting there and buying Italian bonds was unpalatable for the ECB without new leadership. So when it gets it, and starts buying, we buy time. We buy time to get the banks to sell their sovereign debt and lower their risk. We gain time that a recovery needs to take root.

We know that when we have time we can prevent major catastrophes or, more, important, have plans in place to deal with them.

What does that mean for the U.S.? Very simple: We will pay more for our earnings in an environment where the price-to-earnings multiple has been shrinking pretty much for ages. You reverse that, you pay more for these earnings, you get a higher market.

We are up against resistance. There has rarely been a chance to breach it. But we are no longer overbought, at least according to the S&P oscillator I use. I believe that means we won't be thrown back into oblivion. We reached maximum pain and panic on Wednesday. That inoculated us for a couple of days, during which we might get some positive surprises, not just negative surprises.

The easiest thing to do right now is to stay as negative as possible.

I would rather adjust and say, "Good things can happen in Europe." That's a new stance. But to ignore the leadership change is to forget that leaders do matter. Churchill was better than Chamberlain. FDR better than Hoover. The center held.

It can happen again.



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