Given how weak the world is getting, it's no wonder investors are fearing the worst-case scenario for this market, Jim Cramer said Tuesday on CNBC's "Mad Money." "But let's not lose sight of the best case."
As Wall Street took a bit of a breather today — with the Dow Jones edging up 0.22 percent at 12,127, the Nasdaq notching a gain of 18 points, or 0.66 percent at 2,778 and the S&P 500 rising 0.57 percent to close at 1,285 — Cramer spelled out what would happen if things firmed up in the euro zone and if the markets turned around.
He said a compromise between Spain and Germany is what the world needs most right now, and that Spanish banks needed a way to guarantee all depositors would be insured in euros to prevent any more daily runs on the bank. "It's vital that Spanish depositors be given a reason not to pull out of Spanish banks," he said. "Because right now, it is rational to do so."
So, if the pan-European solution did, in fact, pan out, what would happen?
First, investors would see China lower interest rates and execute a major stimulus plan, Cramer said. The "Mad Money" host said the Chinese are simply waiting to act on any healthier signs from Europe to put their money to use. "If China starts growing again then we would be able to have an engine strong enough to pull countries like India and Brazil back off the brink," he said.
Next, the increasing stability would boost investor confidence and encourage international companies to commit some of the $2 trillion they have on reserve to expanding their businesses. And since assets are so undervalued right now, investors should also anticipate a wave of mergers and acquisitions activity. The positive news would also take some of the pressure off any U.S. banks that are currently suffering from European exposure, Cramer said, which would allow banks to start hiring again.
And while many international corporate earnings are now at risk, Cramer said, this would not be the case if things got better in Europe. Many U.S.-based firms — firms like Starbucks, McDonald'sand Cisco Systems — would enjoy higher estimates where their earnings are concerned.
But none of this positivity will play out unless Germany loosens its purse strings — adding that Germany cannot afford to bring back the Deutschemark, because other nations would have the advantage of much weaker, more competitive currencies and because it would hurt German exports. "The Germans have put no premium on growth and I doubt they will until their growth falters," he said. "And that's exactly what's beginning to happen."
As for the alternative? "More bank runs and disorderly disunion that could lead us to the worst-case scenarios I traced out last night," Cramer said.
The bottom line: The situation in Europe is a convoluted one, but if Germany can make a move — even if it was forced into a compromise by a Lehman-like event — the markets will likely bounce back 10 percent or more shortly after.
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