Spring is in the air

Leaves return on trees, plants start to blossom, skirts shorten, people relax, Federer gets his ass kicked by a Spanish concentration of testosteron (style over brute force), it’s good to see that some things never change. In times like this we need a little stability for orientation. Markets are also up. Can it last?

For weeks, we’ve been saying that we don’t trust the US stock markets, and we have to admit that we’ve been a little surprised by the recent data coming out of the US. According to the official figures, there is not even a recession (yet?).

GDP grew at an annualized 0.6% and even the jobs data, although negative, were not as negative as consensus expectations. The markets rallied. The Dow is now less than 10% off it’s all-time high and up more than 1000 points since early March.

We posted earlier about how bad the situation is (the housing and credit crisis, inflation, consumer confidence), and describing the forces that work to stabilize the economy (monetary and fiscal policy, the lower dollar), and their limitations.

One also should realize that the Dow consists of many big multinational corporations that, although American in origin, now depend for their sales as much on the rest of the world as on the US.

But still. House prices have fallen more than 10%, the financial system has been to the brink of collapse, credit is still very tight, and banks still don’t trust one another as one can read from the so called ‘TED spread‘, the gap between three-month Treasury bill rates and the three-month London interbank offered rate (LIBOR)

are also tightening credit, and thereby worsening the business cycle. When times are good, credit is so easy they almost force it down your throat (which is one force that led to the sub-prime crisis). But now that things have gotten bad, and companies and individuals really do need credit, the supply and conditions are tightening up. No wonder banks are unpopular.

Monetary and fiscal policies are working overtime, central banks have taken truly unprecedented steps to stabilize the financial system. The markets now seem to think that they will be successful, or, in the words of top economist Paul Krugman (written in March, but still valid):

“investors’ belief that other investors would believe that it would work”

James Dinon, the head of JP Morgan Chace (yes, that bank that is taking over Bear Stearns, with the help of the FED, one of those unprecedented steps taken by monetary authorities recently) does not think it’s over yet, he said in an interview in the German Welt am Sonntag.

We also remain very wary of the markets.

(By the way, for our Swiss friends, too bad. One day Federer will overcome his Spanish nemesis on gravel)