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The Risk Trade Has Not Gone Away—Yet

Monday, 30 Nov 2009 | 4:32 PM ET

Dubai's late-day announcement that it would be seeking to restructure $26 billion in debtlifted U.S. and European bank stocks (the theory is that there is a number on the restructuring).

Still, for all the worries about Dubai, the market was again slave to the dollar...stocks moved down as the dollar rallied mid-morning, then moved up as the dollar weakened in the last hour of trading.

For all this worry, trading was at best average, while volatility was very much contained. The main strategy of hedge funds and active traders has remained the same for the whole month of November: do nothing.

The strategy is working beautifully: pullbacks have been well contained.

So if they are not worried about Dubai, what are they worried about?

They ARE worried about Dubai, but there is a big macro trade out there that has made BILLIONS in profits for active traders, saved many jobs on Wall Street, and still shows signs it might keep working.

You know what it is:

1) there is a tidal wave of liquidity in the world, provided by central banks;

2) the U.S. government has incentivized speculation by paying out nothing for bonds yields, which is encouraging the continuation of the short dollar/long commodities/long emerging markets trade.

3) the big macro issue is, how will private sector handle the stimulus withdrawal?

And if you can answer the last question, you will be able to make the next big fortune on Wall Street.

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Questions? Comments? tradertalk@cnbc.com

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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