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Last week, many headlines blared: "Europe finally faces reality." There is now consensus that either the Eurozone will dissolve or Europe will finally form a true fiscal union. Just about everyone agrees the latter is preferable, but Germany insists it will not back eurobonds or deposit insurance unless countries cede control of their budgets to a central European authority. Most other eurozone countries (including France most importantly) are refusing to give up sovereignty. Investors are optimistic that Eurozone leaders will quickly lay out a plan and the ECB will plug any gaps in the mean time. To make it clear just how dire things are in Europe - both Italy and Spain will begin defaulting on debt within 4 months without additional aid. This week, Spanish ministers began openly begging the ECB for aid for its banks, announcing that the market is refusing to finance Spanish debt.

I can't handicap this game and I think Europe's problems are probably fairly priced in the market. If Eurozone leaders get their act together in time, equities will pop, otherwise they'll plummet. There's probably no value in us betting on the outcome at this point. I covered the last of my short euro position.

While the world watches Europe, my concern remains the US. Most data out of the US last week was dismal, ranging from increasing unemployment to worsening PMI indexes. I remain very concerned that early in the next president's term we'll get fiscal tightening and the austerity will have dire effects. Additionally, the market is now pricing in some form of additional quantitative easing, but I expect that a basic extension of "operation twist" and even large mortgage purchases will be met with an equity sell off. Without something more aggressive, investors will rightly wonder what difference another 30 basis points in lower yields will make when 10-year notes are already at 1.6% and 30-year mortgages are at 3.8%. Anything short of outright money printing is just "pushing on a string."

Back in 2008, I was convinced by my study of economic history that the collapse would likely come in two waves. First we had a very sharp collapse followed by a sharp rebound. Then I expected a second wave down after which equities would simply sit near their lows for an extended period, probably several years. The first rebound happened sooner and was sharper than I expected because of the unprecedented quantitative easing. I don't expect to time the second wave any better, but I remain confident in the general pattern. So, I'm in no rush to get long equities in general. Don't worry about repeating 2009's mistakes and missing the rebound. Still, I'm a value investor, and I'm always on the lookout for specific value opportunities. Today that means I want to find the most hated stocks so I'm looking in Europe, and in the beaten down energy sector. My schedule as a trader and MBA student keeps me busy and makes value hunting difficult, so if anyone has any specific picks in these sectors, I welcome suggestions. One last point - given the strong rally in treasuries and sell off in risk assets and the constant talk of Europe, it feels like the risk is for a continuation of the trend - more bad news, deflation, and "risk off." The opposite is true. Anyone with more than a 6 month time horizon should be far more concerned about inflation. The market is already pricing in global recession with some small chance of global depression. That's why investors are accepting yields of below 0% on short-term Bunds, and below 2% on 10-year Japanese, German, and US bonds. To sleep soundly at night, we should be confident that our portfolios will withstand the surge in inflation that is very likely to start sometime in the next 5 years.