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The Risk-Off Trade Now

The risk-off trade. The announcements over the weekend failed to put a floor under European bonds. Spanish bonds, for example, are up nearly a quarter point, to 5.40 percent on the 10-year. The market is saying Europe failed to put a firewall around Greece — then Ireland.

This is morphing into a political crisis. Still more turmoil: Italy will pass a budget on December 10, followed by a vote of no-confidence in the Prime Minister on December 14; it is possible Berlusconi could fall. And German state elections are held at various times during the first half of 2011.

The euro zone and Korean issues are creating a retreat to the dollar, but is it the best place to retreat?

All the dysfunctional fiscal and monetary policy focus has been in Europe, but there is plenty of dysfunction here in the U.S.:

1) The continuing resolution that funds the government runs out this Friday, so the House and Senate must vote on a new continuing resolution by then — or the government shuts down.

2) there is still no consensus on extending the Bush tax cuts — and I'm not just talking about the income tax issues. It is still not clear what will happen to dividend and capital gains taxes, or the child tax credit, among other issues.

Regardless, the Fed cannot be happy about a rise in interest rates, or a decline in the stock market.

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