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Europe has been kicking the decomposing debt can down the road, but the can has hit the fan.
Investors had hoped that Greece's debt problems would be contained to Greece. They'd hoped the face-saving deal that Germany and France brokered in late October — which cost Greek Prime Minister George Papandreou his job "“ would put a floor underneath the euro.
But hope is not an investment strategy. Italian opera is playing alongside Greek tragedy, and investors aren't hanging around to see which other countries join this debt-ridden production. Anyone fancy France?
The question investors need to ask is the same as always: What now?
One answer comes from David Rosenberg, chief economist & strategist at Toronto-based investment manager Gluskin Sheff + Associates. Rosenberg has long been skeptical, to put it mildly, about the European Union's ability to keep its Tower of Babel from tumbling into recession.
Rosenberg doesn't claim to know how this debt crisis will be resolved. "The problem with Italy is that it is too big to save and too big to fail given the systemic risks to the banking sector," he told clients in a research note on Wednesday.
Instead, Rosenberg looking at what we do know "“ and investors would do well to peer over his shoulder.
"What we can expect to see is continued heightened volatility in the equity market," Rosenberg wrote. "A focus on hedge funds with an eye towards being tactical and opportunistic is going to take on even more importance."
And with the Federal Reserve expecting U.S. unemployment to be pushing 8% at the start of 2014 and near 7% a year later, Rosenberg suggested that interest rates would remain low for at least the next three years.
Two areas that will prosper in that environment, he said, are gold and bonds, especially corporate bonds, which "offers the potential for equity-like returns in coming quarters without having to take on equity-like risk."
Rosenberg remains a harsh critic of Europe: "It is apparent to me that there is no near-term resolution to the European sovereign debt and banking sector problems. This latest bailout attempt for Greece has proven to be little more than a charade."
Charades are facades; well-intentioned, perhaps, but spineless. What investors need now is certainty. What they've got is certainly far less.
– Jonathan Burton
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