barron

Cognitive fog. It's a common complaint for which there's no known cure, and it seems to afflict virtually every politician, whether currently or no longer in office. It manifests itself by enfeebling the affected unfortunate's memory.

Last week, it claimed its latest prominent victim in Texas Governor Rick Perry, an aspirant for the GOP nomination for the presidency. Mr. Perry, in a televised debate with other wannabe presidents, revealed that he's completely incapable of enjoying more than rudimentary recall by being unable to remember the name of the third of a trio of federal agencies he would abolish if elected.

That politicians are especially susceptible to cognitive fog, if medical science is to be believed, reflects an extended close-up and personal exposure to their own gaseous emissions ingested in great quantities during an election season. In the case of Mr. Perry, the condition was aggravated by his insistence on wearing a 10-gallon hat atop a 20-gallon ego.

Mr. Perry sought to achieve a measure of damage control by making merry of the lapse, taking a jocular stance on a clutch of TV shows, early and late, and at one point facetiously suggesting he stumbled to take the heat off another aspirant to become the nation's CEO, Herman Cain, who can't remember the names of several women he has been accused of accosting while in the private sector. Only an irredeemable cynic could imagine that Mr. Perry slyly inserted Mr. Cain's name into the conversation to remind voters of why the heat was on Mr. Cain.

Cognitive fog also has visited grief on Jon Corzine, the ex-governor of New Jersey and until quite recently the head dude at MF Global, the now famously bankrupt securities house. Mr. Corzine couldn't remember what happened to $600 million in customer money that seems to have vanished. Perhaps if he borrowed Mr. Perry's 10-gallon hat it would jog his memory.

With 2012, an election year, looming, we can confidently expect instances of the affliction to increase astronomically. We strongly advise civilians to stay out of harm's way and give wide berth to any candidate for higher office who ventures near you.

BY NO MEANS THE LEAST OF the myriad things that puzzle us about the barely credible mess the euro zone has managed to enmesh itself in is the widely held supposition that, if worst comes to worst, Germany will come galloping to the rescue. That entails the blithe assumption that Germany possesses the will and the means to do so. On both counts, we've had occasion to express our dubiety.

This is not to deny that the country can rightfully boast a strong work ethic and a highly productive labor force, modest inflation, a current account surplus and, in happy contrast to so many of its woe-beset neighbors, an admirably prudent fiscal course. But its populace is still spooked by the eternal ghost of the horrendous inflation after the first World War that laid waste to its economy and set the stage for the ascendancy of Hitler and his barbaric crew.

An even more tangible inhibitor of Germany rushing to don the mantle of savior of the European Union is that it may lack the means to play that role with the necessary financial gusto (or, if you prefer, fecklessness). For despite the relative robustness of its economy (and the stress here is on relative), it is hardly immune to the debilitating crisis that is wracking the Old World.

That's evident in a pair of recent dispatches by Nancy Lazar, of Ed Hyman's splendid team at ISI Group. Nancy has been pretty much on the money in sizing up the outlook for a number of foreign markets, and her take on Germany seems right on the mark as well. Eschewing a lot of the mumbo jumbo that too often makes economic analysis all but indecipherable, she makes her points lucid and graspable.

She posits, for example, that even without capturing fully the fiscal drag and contagion from the crisis, inflation-adjusted gross domestic product, which in the September quarter rose 2.5% year-over-year, will head for zero growth next year. That rather glum prospect is in keeping with recent weak readings of, among other indicators, German business expectations and slowing consumer spending.

The country's exports have softened, which, we guess, won't knock your socks off, since something like 70% go to the rest of Europe. German factory orders in September, paced by a 12.1% plunge in demand from the rest of the Continent, were off overall by a fairly awesome 4.3%.

Corporate earnings have begun to give ground, absorbing the one-two punch of a weaker economy and a rise in unit labor costs. Consumer confidence has diminished as well, a trend that obviously isn't destined to help retail sales.

And there's this, too: Expressed as a percentage of Germany's GDP, German bank exposure to debt from France is 6.1%; Spain, 4.8%; Italy, 4.4%; Ireland, 3%; Portugal, 1%; and Greece, 0.9%. As Nancy comments, the total of German banks' exposure to peripheral and French debt is equivalent to 20.2% of Germany's GDP, "high by any standard."

She isn't predicting Armageddon. And she takes pains to point out that the ever-vigilant Rottweilers and Dobermans that stand watch over the bund market haven't lost their cool in a highly charged and chaotic financial environment, as witness near-record low yields.

But she makes it clear that, contrary to the common misperception that the Germans are putting on a display of Teutonic stubbornness in their cautious approach to bailing out troubled fellow members of the European Monetary Union (although there's always a bit of that, we suppose), they are exhibiting an uneasy awareness of the limits of their own less-than-vibrant economy.

And it obviously makes the job of extracting the EU from the morass into which it has sunk that much more, shall we say, problematic. While the changes at the top in both Greece and Italy provided a temporary balm late last week and lit a modest fire under global equity markets, it by no means assures survival of the euro, or the European Union as we know it.

PLEASE, DON'T GET THE WRONG IDEA. Dwelling on Europe's wretched condition, as we have to some extent these past few months, springs not from any xenophobic impulse—we think it's a great place to visit. It's simply that it doesn't take very much analytical acuity to realize that for better but probably for worse, that's where the action is. And more important from an investment standpoint, what happens to Europe will exert a huge impact on world markets and economies, very much including our own.

More and more we're convinced that a break-up of the European Union and/or another severe recession would have one very ugly effect and encompass just about the whole of this aching planet. According to Michael Darda of MKM Partners, a bad recession is what the euro zone bond markets say we're in for.

And while investors and just about everyone else breathed a sigh of relief last week after Italy promised to try to straighten up and fly right, Michael points out that Friday morning spreads between the European Financial Stability Fund bonds and German bunds were the widest ever. Something less than a vote of confidence that everything was A-OK.

Comes now the insightful David Rosenberg of Gluskin Sheff to toss his bit into the mulligan stew of opinion on the travails of Europe and their implications. For the most part, Dave is not very upbeat about the outlook (he rarely is). Paradoxically, the sudden hopeful talk touched off by the changes in Greece and Italy adds to his unease since it seems to imply happy days are here again, while ignoring some unpleasant little items like the fact that Greece is still heavily burdened by $500 billion worth of sovereign debt, while Italy has a debt load some five times larger than that and an economy that's gone nowhere for a decade.

France, Dave believes, is next in "this domino game," and the response to S&P's goof on whether it was downgrading that nation's triple-A rating (it turns out, not yet) suggested rather emphatically any such move would not sit well either with the powers-that-be or the run-of-the-market investor. Even so, it looks to us like merely postponing the inevitable.

"Those who can't see the contagion and systemic risks really have to get their heads out of the sand," Dave grumbles. China, he says, is facing a credit and property bubble, while both it and India have just completed monetary restraint programs that have yet to percolate through the real economy.

The European Union sovereign and banking-sector crisis, he predicts, is likely to dominate the global and financial market scene for many months, maybe longer. He notes that private-sector bankruptcies aren't exactly rare, nor are defaults by small less-developed countries. But this time around, we're not confronted by a Lehman or even an Argentina.

Rather, he points out, we're dealing with something much bigger and much more serious—a sovereign credit crisis among developed countries including some heavyweights. Italy, for example, is the world's eighth-largest economy with the third-largest bond market. Because they're locked into a monetary union, these nations are helpless to follow Iceland's lead and, reflate their way out of their bind.

Faced with this grim outlook, where does a poor investor hide? Invariably thoughtful, Dave provides a somewhat sketchy answer to that pressing conundrum. Among his chosen picks is, of course, gold, followed by a smattering of non-cyclical equities with decent yields and a shot at dividend growth, high-quality bonds and, presumably, on the theory that people gotta eat no matter what, raw-food suppliers.