Tuesday, March 24, 2009

Are we seeing the first signs of recovery, or just a temporary bear-market rally?

TO BE NOTED: From Worthwhile Canadian Initiative:

Two questions; no answers.

Are we seeing the first signs of recovery, or just a temporary bear-market rally?

What caused it? Fiscal policy? Monetary Policy? Financial policy? Or did it just happen by itself?

As I said, I don't have the answers, but while the rest of the economics blogosphere seems to be concentrating on AIG bonuses and the Treasury Plan, I thought I would at least raise these questions. I do so hoping that your comments might help us at least recognise more of the symptoms, and help provide the evidence for a diagnosis. Let's pretend I'm Gregory House. (Well, at least I look a bit like him.)

1. The first and main symptom is a rise in stock prices. Since about March 10, stock prices have been increasing.

2. The increase in stock prices has been global, across most (all?) countries. (Any important exceptions?)

3. The increase in stock prices has been broadly-based, across most (all?) sectors. (Any important exceptions?)

4. Commodity prices, like oil, have been increasing. (Any important exceptions?)

5. The US dollar has fallen against most other currencies. (Any important exceptions?)

And for the dogs that didn't bark:

6. Not much change in interest rates, except for the bonds that are directly targeted by quantitative easing policies.

7. Not much change in the Ted spread.

8. Not much in the way of news about the real economy.

And for news on the policy front:

9. News on quantitative easing by the Bank of England and the Fed.

10. News on the US Treasury plan to buy banks' assets.

11. Not much news on fiscal policy anywhere.

So, what important relevant symptoms (or absence of symptoms) have I missed?

And what diagnosis could fit those symptoms?

I am leaning towards a mix of monetary policy and/or "there wasn't any unexpectedly bad news, so the recovery started by itself". But I have no idea if this is just a temporary stock market bounce or the beginnings of a recovery. From reading Across the Curve I do see anecdotal signs of a reduced shortage of liquidity, with some yield anomalies falling in recent days. The liquidity story fits with the news on monetary policy, and with the falling US dollar exchange rate.

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