My Take on the Market

The stock markets around the world have rallied for quite a few days in the hope that the European leaders reach an agreement to solve the sovereign debt problems. After the Sunday and Wednesday meeting, the leaders have agreed to increase the emergency fund to 1 trillion euro and with a desperate attempt to quell the fear, brought China as a possible key player to cleaning up this mass. 

However, the reality is that it is no longer a liquidity crisis but a solvency crisis. The fact is these indebted nations do not have the kind of economies that can generate sufficient current account and budget surpluses to get out of the mass and pay off the debts. As such, the increased emergency fund is merely going to relieve the problem temporarily and the politicians will be pushed to be in talks to agree to even bigger emergency fund and so forth in an attempt to avoid or delay the inevitable. Often times, the market can deviate from the rational "fair value". However, it will eventually revert back to normal and when it does, it is not going to be pretty.