Bizarro Markets Again

The markets are nowhere near pricing in a world where 15% of Europe's GDP goes into energy payments. Think about how the world financial markets behaved in 2000 and 2008 when about 3 percent of GDP was lost. The effects are enormous because that 3 percent isn't spread evenly over the economy. Sectors such as manufacturing can see double-digit declines in sales and profits. Now think about 5 times as much spending being shifted. Think of it this way: imagine the US had to shut the entire healthcare sector. All the hospitals, biotech firms, Band-Aid manufacturers, doctor, nurses and administrators, it's all gone. Or consider federal spending is about 23 percent of US GDP. European consumer spending on non-necessities will fall to near zero.

There is a bullish case here: Europe blinks. The financial markets could easily rally 10 percent on that news. How that shakes out with oil prices and inflation would take time.

The bearish case is they don't blink. I'd wager almost none of this risk is priced in because it's extreme risk. Every multinational consumer company might see sales tumble towards zero if this plays out in the worst way possible. This would cause a Great Depression 2.0 because debt would default or the ECB prints enough such that the currency absorbs the losses. I have no idea where EURUSD could go in that scenario, but 50 cents is probably on the optimistic side.