• Investing & Markets

Weekly Market Digest – Week Ending 11/11

November 11, 2011 | Craig Birk, CFP®

The roller coaster that is the European sovereign debt crisis continued with gut wrenching ups and downs. Equity markets followed course, ending the week mostly higher on a feeling that some progress toward resolution is being made.

Major Events

  • Monday – Stocks rise as the ECB’s Juergen Stark predicted the debt crisis will be under control within two years.
  • Monday – Herman Cain’s presidential campaign hit a speed bump as another woman came forward with claims of sexual harassment.
  • Tuesday – Italian Prime Minister Berlusconi pledges he will resign after austerity measures are passed. Stocks rally.
  • Tuesday – The UN’s nuclear agency publically accuses Iran of developing nuclear weapons technology.
  • Wednesday – Italian bond yields spike over 7%, causing a global selloff in stocks and all “risk” assets.
  • Thursday – Italian bond yields drop after the ECB buys new debt in auction.
  • Friday – The Italian Senate approved measures to cut the budget deficit. Stocks rally.

Our Take

Italian bond yields on Wednesday rose above 7%, the perceived “point of no return” (they have subsequently retreated). Yet for the week, stocks rose anyway. Why? Because the idea of the ECB monetizing troubled sovereign debt (a.k.a. printing money) is becoming more and more commonly voiced and viewed as a viable option. Technically, the ECB is not allowed to print money to bailout countries who can’t meet their obligations. But this doesn’t mean it won’t if everyone wants it to do so because the alternative could be disastrous.

The big hurdle is Germany, who is still very aware of its painful experience with printing money leading to hyper-inflation after World War One.

Assuming Germany relents, the ECB will have to ultimately bail out Italy and maybe Spain. This is not a welcome scenario but it could be successful. Unlike Greece, the Italian deficit is not that bad (their total debt pile is very bad, just not the yearly deficit). If the ECB decides it will buy all necessary Italian and Spanish debt, the situation will stabilize at least for a while.

Yes, this is a slippery slope, and a dangerous one. Handled poorly, inflation could take off and Germany could become antagonistic toward her less fiscally responsible neighbors. But it is better to do it now than wait until things become more immediate. Once banks realize they will not get destroyed by sovereign debt write downs, they can begin to lend again. Who knows, maybe Europe may even begin to grow again. As we point out almost every week, the US economy continues to silently move forward.

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