In the debt crisis, everyone seems to focus on the possibility of Greece getting kicked out of the European Union, or rising bond yields in Spain, Italy, Portugal and others on the periphery.
I find very few who are entertaining the possibility that Germany, the strongest country in the Eurozone, quits.
Take a look below at the price ratio of the iShares Germany ETF (NYSEArca: EWG) relative to the Vanguard Europe ETF (NYSEArca: VGK).
A rising price ratio means the numerator/Germany is outperforming (up more/down less) the denominator/VGK. The opposite is also true of course. A falling ratio means the Germany is underperforming (up less/down more) the denominator.
Forget that the fact that the price ratio of Germany relative to the rest of Europe is near three year lows. Forget the fact that Greece two year yields are trading north of 40%.
The biggest issue with the above ratio is the speed at which the decline happened. If investors were to continue to slam German equity markets at this pace, there could be a real feeling among the German public that it should back away from the Euro and separate itself from the debt burdens of Greece, Spain, Portugal, and Italy.
Of course it seems like an unimaginable scenario, but do not underestimate how feverish the mood of the crowd can get when losses happen so swiftly. [Euroe ETFs Fall as Short-Selling Ban Extended]
And believe it or not, iShares MSCI Italy (NYSEArca: EWI) may now start to outperform Germany! Of course, that is not a directional call on my part. Rather, I’m just suggesting that Italy may outperform the strongest country in the EU which is being asked to lend a helping hand.
Disclosure: The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.