将意大利、葡萄牙和爱尔兰现如今的信贷违约掉期（CDS）与2011年7月1日进行对比，便能在一定程度上说明选择破产策略的必要性。我们可以看到意大利掉期增长140%，葡萄牙增长38.2%，爱尔兰减少3.2%。公平地说，爱尔兰还没有破产，但它最大的三家银行Allied Irish、Irish Life & Permanent和Bank of Ireland已经历过“信贷事件”，而且爱尔兰的信贷质量因此有所改善。
Failure is not a bad thing. Sure, losing or failing doesn't give you the warm fuzzies inside, but failing and adapting ultimately sets you up for greater success. In a 2008 commencement address to Harvard, author J.K. Rowling, who made a billion dollars for her Harry Potter series, adroitly summed up the benefits of failing when she said:
"So why do I talk about the benefits of failure? Simply because failure meant a stripping away of the inessential. I stopped pretending to myself that I was anything other than what I was, and began to direct all my energy into finishing the only work that mattered to me."
As it relates to Europe sovereign debt, the one solution that has not been seriously considered is failure. Instead, the key solution from almost every Eurocrat and talking head, is to continue to support and promote a broken banking system and failed monetary union. There are other possibilities: let Greece fail, let other sovereigns fail if they can't get their house in order, and let heavily exposed banks fail.
The validation of the failure strategy at least partially comes in comparing the credit default swaps of Italy, Portugal and Ireland from July 1, 2011 to today. Respectively, Italian swaps are up 140%, Portuguese up 38.2%, and Irish down 3.2%. Now to be fair, Ireland hasn't failed, but three of its largest banks, Allied Irish, Irish Life & Permanent, and Bank of Ireland have experienced "credit events" and, as a result, Ireland's credit worthiness has improved, on the margin.
A more pressing question facing stock market operators is: will this current stock market rally fail? In the near term, the key driver of the stock market will likely be corporate earnings reports. To sustain positive price momentum, companies will need to both hit their estimates and also maintain future guidance. Currently, according to Bloomberg consensus estimates, 2012 consensus expectations for EPS for the S&P 500 is $106.15, which implies 16% year-over-year growth in earnings.
Certainly, that type of earnings growth is possible, but it is highly contingent on underlying economic growth. Currently, our view is the economic growth will be in the sub-1.0% range in 2012. In the last 30 years, there have been five years of 1%, or less, GDP growth in the U.S. On average, in those years, S&P 500 earnings declined 18.3% y-o-y. Thus, unless economic activity accelerates in the U.S., it is highly unlikely that 16% y-o-y growth in earnings is met. Assuming the Hedgeye view of economic growth is correct, there is substantial downside to current 2012 consensus earnings estimates. History would suggest, as outlined above, that 2012 earnings could be too high by at least one-third.