Will European Riots Trigger a Rally?

By Todd Harrison We asked last week whether European Dominoes Would Tumble Towards America. I suppose the more pressing question is whether they'll first fall on each other. I awoke this morning and scanned the headlines as per my usual routine. There, splashed across the front pages of The New York Times and The Wall Street Journal were vivid images of student protests in Italy and London. Evidently, the kids aren't alright. They were none too pleased with the planned tuition increases and education cutbacks.

(To read Lloyd Khaner's piece on why the market is nervous, click here.)

“Social unrest,” I said quietly under my breath as I sipped my coffee, “We've officially arrived in the second phase of the tricky trifecta.” We mapped the Five-Step Guide to Contagion in February; denial, anger, bargaining, sadness, and acceptance. It is every bit the sovereign sequel to the first phase of the financial crisis. The question we must ask ourselves is two-fold. First, what did we learn from the banking crisis and how will policymakers apply those lessons to our current conundrum? Second, if this is an inevitable progression, are we about to enter the “bargaining” phase and what does that mean for the markets?

(To see Vitaliy Katsenelson's article on why you should be wary of @QE2's success, click here.)

A few weeks ago, scattered among my Random Thoughts, we asked:

Could you imagine the reaction if the EU somehow managed to herd cats and roll EU-Member country debt out five years? Wouldn't that be akin to Wormer dropping the big one in The War on Capitalism?

We pondered that ever since -- is it possible? Could disparate countries with self-serving agendas come together? What would the unintended consequences of a unilateral bondholder haircut be and how would that manifest across global asset classes?

(To view James Kostohryz's position on why we should ignore Europe, click here.)

This morning on Bloomberg, following the global “no-confidence” vote on the back of the Ireland package, several solutions were offered by analysts at Societe Generale SA and Barclays Capital (BCS). They included boosting the trillion dollar bailout or shifting the mandate, issuing joint bonds for the sixteen euro nations or flooding the economy with cash from the ECB. While The New York Times called those measures “more grandiose at the moment than practical,” other ideas -- “especially those that come with a call for bondholders to share the pain by taking some losses on their holdings, are being examined in a new light, even though investors remain adamantly opposed to such measures.”

To read the rest, head over to Minyanville.