The stunning jobless numbers of the US last week warrant a return of concern away from Europe, where things seem to be deteriorating more slowly now, to the US once again. The difference is that fears that the US and the rest of the world faced financial Armageddon seem to have abated. The massive amounts of government borrowing and spending now planned have apparently arrested a freefall of the financial system and the economy, and the Treasury Department’s plan to extract toxic assets from banks doesn’t appear to have been completely derailed by the Financial Accounting Standards Board’s new ruling on mark-to-market, though the jury is still out. The Treasury is also considering broadening the list of private investors it will let buy the non-performing assets.
So optimism is rising, or put more accurately, pessimism is abating. Stocks have begun to bobble off their lows and credit markets appear to be thawing. But it’s too early to call a bottom. It is likely to cost even more to resuscitate America’s banks, and it could be six months to a year before housing prices and employment rates bottom out. Companies are still cutting salaries, benefits and jobs. The US could face years of excess capacity, a problem not only for American industry, but for exporters in Asia. And capital flows into and out of the US – the throbbing nucleus of the liquidity bubble that for so long absorbed the excess savings of emerging markets and then allocated risk capital back out to finance emerging markets’ growth – has plummeted.
Nonetheless, investors are now returning to risk, believe it or not, and concerns that had hitherto buttressed US Treasuries are now buoying emerging markets. Some of this is based on an expectation that inflation will return as the Fed’s quantitative easing takes its toll. The dollar is consequently suffering. This should be positive for commodities as inflation hedges, such as gold and oil.
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