Right now, the Fed is paying 1.00% interest on excess reserves (which are the vast majority of bank reserves right now). This is equivalent to offering banks one-day T-bills at an interest rate of 1.00%. The current yield curve for T-bills starts at 0.01% for 3 months, rises to 0.28% for 6 months, then to 0.50% for 12 months, and then reaches 0.92% for 24 months. Given this, it is clear that the interest rate the Fed is offering on bank reserves is far above market for a risk-free investment.

http://www.realclearmarkets.com/articles/2008/12/why_the_economy_is_in_a_tailsp.html

Job growth will be key because housing is unlikely to rebound until foreclosures go back down.

I’ve been listening to the economist who works for the real estate agents’ trade group claim since 2005 that the bottom of the housing market is only 6 months away (every 6 months!). I’ve yet to hear anyone who really understands the housing situation across the nation.

I see no real progress in dealing with the auto industry. Chrysler is still moribund and GM is still operating with the same team that lost $82B over the past four years. The only real difference I see 6 months from now is that Ford will then need bailout funds to stay alive. Construction is largely limited to government stimulus spending and a good chunk of that is offsetting normal state spending that has been curtailed due to declining state tax revenues. The yield curve may be upward sloping because we’re financing the stimulus and bailouts with long term government bonds.

Europe is still a mess, will take longer to recover, and still has the potential of Eastern European banks taking down the rest of the continent. Protectionism is likley to only increase and so our export market is unlikely to recover.

I think we need to get through April to get a sense of 1st quarter earnings. Most the stock market’s tanking in February and early March was due to earnings dropping off everyone’s assumed range. Keep in mind that there have been major dividend cuts, especially by the banks. The banks are doing this to horde cash in order to pay back uncle Sam, but the core issue still remains – what is the status of all these toxic assets AND is the current rate of foreclosures making them worse?

I am still not quite willing to stick my toes back in the water yet though. My thoughts are closer to what John Tamny says in this article:

Down Markets and Dumb Economic Myths
By John Tamny

Be it up markets or down markets, when stocks are moving powerfully in either direction lots of misinformation seeps into the public discussion. And with shares testing lows not seen since the ‘90s, it’s understandable that a number of wrongheaded assumptions would become conventional wisdom. The problem here is that a great deal of the ‘settled logic’ with regard to housing, recessions, the dollar, free trade, and debt has no basis in reality.

read the rest at:
http://www.realclearmarkets.com/articles/2009/03/down_markets_and_dumb_market_m.html

And I think there will be an encore of crisis for europe, because unlike the US markets are very slow to respond (welfare states). And both France and Germany really hinge their economies on exporting products. Since US citizens will likely buy less in the coming months, this will hit the markets in europe a lot and hard.

what really frightens me is that the recovery that was coming anyway will be attributed to all this wild and expensive action and that we will learn the wrong lesson, making “massive stimulus” the knee jerk response from now on.

part of the reason this downturn was so harsh was that we never really let the one in 2000-2001 happen. recessions should be frequent and mild. attempting to circumvent the recessionary process just builds up more imbalances that make the damage much worse when it does come and leaves more people unprepared to deal with it.