When do the markets start taking the obvious insanity of politicians seriously?

It's been clear up to this point that the financial markets have not taken what is an ever clearer picture of the true insanity of members of Congress seriously. How do I know that the markets haven't taken it seriously? Because we are still standing far too close to one year highs. The fact that we have fundamentalists in Congress who believe that they must obtain a total victory or they'll take the whole country with them should be more disquieting to markets than it has been so far.

I fear that this may be like the TARP vote, which I will maintain to my dying day was necessary, where financial markets had to absolutely implode in order for financial markets to jar Congress out of its tizzy. However, the fundamental problem is that we may not have quite that window available to us. While it is entirely possible that the Treasury can find enough scraps of money around to keep debt service going for a little while if it puts off other key functions, the simple truth is that at some point there will simply not be enough cash on hand to make a particular interest or principal payment. If the Treasury has to pay $25 billion one day and only has $13 billion on hand, to quote a number of characters in a number of movies, "Well, shit". That would cause the requisite collapse in financial markets, but at that point it would be far too late.

As I've noted before in this entire debate, the U.S. has had its AAA credit rating for years for a number of reasons, but one of the most principal reasons is not only has the U.S. never defaulted before, but it has never even really come particularly close to defaulting (with one modest exception in the Panic of 1893) and our politicians have never really considered it a possibility that they would allow it to happen. I think that this bizarre charade alone warrants a loss of the AAA rating more than our current debt load does.

Making Money Off of Europe's Mess: Spain

There is no question that the Euro Zone is troubled right now and will be for some time to come. Greece, Portugal, Ireland, Spain, and possibly Italy are all going to be in the soup for several years. In Greece, nominal GDP is not expected to recover to pre-crisis levels until 2017. Spain and Portugal probably aren't quite that bad, but Spain is clearly still reeling under the collapse of their massive property bubble. Portugal is more troubled than Spain, but it is harder to play Portuguese stocks from here due to relatively few Portuguese ADRs. Sure, there is Portugal Telecom (PT), but that is a stock that is neither good to short or long. It's just not particularly dynamic.

As far as Spain goes, this is an interesting one to watch. The worst of the real estate crisis is making its way through the banks now, though there will be heavy residual damage for a few years to come. The continued malaise of the real economy in Spain will lead to escalating consumer/business defaults and delinquency rates, putting pressure on profits. Additionally, if a major financial crisis befalls Portugal, Spain would likely suffer some collateral damage in both financial markets and real economic activity with reduced exports.

All of the problems both specific to Spain and general to the Euro region have caused Spanish stocks to languish while the rest of the world continues to erase the losses from 2007-2008 very rapidly. The iShares Spain ETF (EWP) is off from a 52-week high of $52.67 a share and is now muddling around $39.62. Similarly, major Spanish banks such as Banco Satander (STD) and BBVA (BBVA) are at very depressed levels. Compared to other regions of the world that have had nice recoveries in their financial markets, this presents a major opportunity.

However, I am not sold on the idea that it would be wise to get involved just yet. It is not at all clear that the debt crisis is anywhere near resolution yet. Also, with Moody's and S&P continuing to downgrade all of the suspect European countries' debt, who knows what might happen.

What do you all think?