Tuesday, November 30, 2010

CAUTION IS WARRANTED! — RISK OFF.

So, the Ireland bailout is signed and a done deal.  Unfortunately, the Euro has continued to fall and worse, Spanish, Italian, Belgian, and Portuguese bond yields have begun to rise at an alarming rate.  At this point, it is clear that the bailout has not alleviated contagion issues. 

But…but…how?  Well, taking care of a debt problem by issuing more debt is just plain stupid.  Unfortunately it’s how we’ve been papering over the structural problems that have been present since the recession started in 2007.  The structural issues have NOT been dealt with. 

At this point, I would seriously consider taking off risk.  This scenario is quite reminiscent of when Bear Stearns went under and the problems were papered over by authorities.  The risk of a systematic melt down is becoming more elevated by the week as market participants are beginning to realize that bailouts are not the answer.

Maybe something will happen where the issues disappear, authorities once again are able to snatch victory from the jaws of defeat, however, those jaws are very big and sharp and I believe that it would be very prudent to pair back risk at least.