On the 9th of March 2009 the FTSE hit its low of around 3450.  Since then it has been an upward path, except for a dip for a month from mid june to mid July, from wence the upward path resumed.  On Christmas eve, on a shortened trading day with very little volume the FTSE manages a close of 5354. Just a hundred points off a 2,000 point move in nine months. But has the economy really improved by 2,000 points worth?  I think not.

Massive stimulus all over the world produced the bounce, but at massive cost, all borrowed.  I can remember attending a seminar in 1998 when there was great concern that the US deficit, counting the unfunded obligations was 6 trillion dollars, and how this was unsustainable and the US dollar would crumble. Well 11 years on and the US deficit is now around 12 trillion dollars, and the purchasing power of the dollar has dropped in those 11 years, but it is still the “reserve currency” of choice for most central banks. Though an article on Bloomberg says “Central Banks Avoiding Dollar to Kill 2010 Rally”

During the year 140 banks failed. There could be a few more added to the total by the 31st.  If the recovery is so robust why is the FED keeping interest rates close to zero for an extended period?  It was low interest rates after 911 that caused the housing bubble. There is still a way to go before the bubble is fully deflated. The new year brings the greatest number of adjustable mortgage “resets” to higher interest rates. Already there is a record rate of “strategic defaults” where the owner can afford the payments but chooses not to as the property is “underwater” (worth less than the mortgage), and the reset to a higher interest rate makes the choice to walk away easy.

Then there is commercial property,the value of which is at its lowest level for 7 years.  With the consumer in saving mode, retailers are doing it tough, just how tough we will find out in the next few weeks when the results of the Christmas spending are reported.  It seems though that increases in sales come from reduced prices, hence margins and t herefore profits will be down. 

The banks are still reluctant to lend. Credit is tight.  The FED and the government is trying to withdraw the stimulus. Look for the US to fall into recession again in the 2nd quarter with a corresponding fall in the markets.