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Germany Controls EU Debt Crisis: Cramer

Tuesday, 17 Jan 2012 | 7:53 PM ET
Mad Money Markets
Mad Money host Jim Cramer discusses Europe's strategy to get out of its debt crisis, and why U.S. markets rally, despite EU downgrades.

Germany has taken control of Europe’s sovereign debt crisis, Cramer noted Tuesday, adding German policymakers have essentially told troubled countries, “give me austerity and I will give you growth.” In turn, the U.S. stock market was able to rally Tuesday despite downgrades of key countries over the weekend.

German leaders are telling troubled nations that to get help, they must first get their house in order. That’s how Spain’s borrowing costs went down as Italy’s were held in check. Both countries are implementing austerity programs that are hurting their growth, but neither will be cut loose like Greece. To Cramer, it seems Italy and Spain are willing to take a hit of a recession in order to appease the Germans. In turn, the Germans will help them get back on their feet without ever having to cut them a blank check.

“There’s been a recognition by the Germans that stock markets matter, that the banks matter, too, and if they can lift their banks and their stock markets, then they can put a stop to the heavy supply of regurgitated bonds that flooded the bond markets over and over again,” Cramer observed. “Once you clean out that supply by forcing the banks to be more creative and issue equity … you defeat the bond vigilantes, who have pushed interest rates so high over in Europe."

Meanwhile, now that there is a dearth of supply, sovereign debt seems like a bargain as rates have fallen to a level that a financial institution could work a good arbitrage trade by taking virtually free money from the European Central Bank and buying sovereign bonds on the auctions, Cramer said. And since these bonds are all in euros, there’s no currency risk, like when all European countries had their own form of currency.

But how long can this last? Cramer suggests German Chancellor Angela Merkel will continue the bond-buying program for the foreseen future. He thinks she will continue to let euros roll off the printing presses to create growth after the trouble countries have embraced austerity because of the price action in gold. The precious metal has been making a comeback as people realize there is positive growth in Europe that doesn’t involve austerity all together. In turn, he thinks gold could go to $2,000 an ounce over the next year and recommends buying the SPDR Gold Trust exchange-traded fund .

Another positive sign for global growth is that the price of copper has had a major breakout. That’s because the Chinese government is done letting its economy cool down. The People’s Republic uses more than 30 percent of the world’s copper, too. He recommends buying the iPath Dow Jones UBS Copper Tota ETF.

“If it weren’t for the larger context of a return to Chinese growth plus European austerity as the path to German-fueled growth, it wouldn’t matter what we’re doing over here,” Cramer said. “Now it does, hence why we can rally after the Friday night ratings massacre, why we can take our eyes off the euro for a moment.”

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When this story was published, Drew Sandholm owned the SPDR Gold Trust (GLD) exchange-traded fund.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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