Why Olli Rehn Is Now More Important Than Ben Bernanke

Despite the better than expected jobs report this morning, stocks are plunging once as fears continue to abound out of Europe. The European Union as a whole is a bigger economy than the United States, and there is more uncertainty about what is ultimately going to happen in Europe than ever before. The "PIIGS" situation is nothing short of atrocious. Greece has already been bailed out twice, and may need a third one. Portugal and Ireland have already been bailed out, and the bears are attacking Italy now. Italy is the kingpin of the "PIIGS", as it has over $2 trillion in debt, and is larger than the other PIGS combined. Italy, with its amount of debt, is the third largest debtor nation in the world. We have seen tremendous volatility in the Italian markets, and Prime Minister Silvio Berlusconi essentially went out earlier in the week and asked for Italian households not to sell stocks. There was a headline on Reuters that the European Financial Stability Fund (EFSF) would not be enlarged, which is what is ultimately needed to save Italy and the rest of the PIIGS. It is currently at $275 billion. Olli Rehn is essentially the man running the show of the EFSF, along with European Central Bank president Jean Claude Trichet. Rehn, the European Commissioner for Economic and Financial Affairs, has come out and said that they need to "encourage everyone to stay calm and breathe deeply." Well Olli, if you want everyone to stay calm, raising the size of the EFSF from $275 billion to well over $2 trillion would do a lot in terms of restoring confidence, otherwise it will be just like 2008 all over again. CDS spreads are starting to move on German and French debt, and most consider that debt to be safe, relatively speaking. There is fear out there and it starting to look eerily like 2008. 2008. That brings a lot of pain to everyone's memory. It was the worst year the financial markets had seen since the early 1930's. The world economy was ultimately saved from the brink of damnation by TARP, enacted by Hank Paulson. TARP saved the U.S. banks from collapsing. Europe never experienced its 2008 moment, and needs to enact its own TARP. The EFSF is the TARP program and it is already in place, but you need tons of grenades in the bazooka if it is going to be effective. Unfortunately, Rehn, Trichet and others are not skilled marksmen. You can not solve the crisis with one shot. Yesterday, the ECB was buying Irish and Portuguese bonds and NOT Italian bonds, which it probably will not do until the EFSF either gets funded fully or does not. Jim McCaughan, of Principal Global Investors, was on CNBC this morning. His sentiment is like that of everyone else at the moment. McCaughan is very bearish on the European, and Rehn and Trichet are delusional. Delusional. One of the most important men in the European Union is delusional, according to McCaughan. Rehn, at least at this time, might be more important than Ben Bernanke, and he's delusional. This can not end well. Olli, now is not a time to be pollyannaish. You need to be proactive, and not reactive. Europe, and potentially the global economy, is counting on you. ACTION ITEMS:

Bullish:
Traders who believe that the EFSF does get raised in size to cover all of the PIIGS might want to consider the following trades:

• If Italy is taken care of, then the iShares MSCI Italy Index ETF EWI is likely to rally, as are Italian banks. So are U.S. equities, which have exposure to PIIGS debt, albeit on different levels.

• Consider high beta names like Apple AAPL, Green Mountain GMCR, and others which would move higher if Europe is saved, at least for a few days.

Bearish:
Traders who believe that the EFSF is not going to be enlarged may consider alternate positions:

• If Italy and ultimately Spain are allowed to fail, the disaster could be horrific. It will likely be worse than Lehman in 2008. Run and hide if that happens.

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