With green shoots everywhere, the markets are charging on, ignoring any number of warning signals about the rapidly rising toll of damage the global recession is now wreaking.

Investors are pushing shares up for a sixth week and copper prices are rising, as are prices of agricultural commodities such as coffee and wheat. Gold is falling, oil is sort of steady around the $US50 a barrel mark and the feeling is one of merriment and joy as the good times return. Both Bloomberg and the Financial Times are now blithely reporting that ‘risk aversion’ is falling.

This is best exemplified by the monthly Fund Manager Survey from Bank of America/Merrill Lynch which revealed “the most optimistic reading on global growth since 2004.

“A net +24% of investors believe the global economy will strengthen over the next 12 months. China remains the principal catalyst but growth optimism has now broadened out to all regions, including previous laggards Europe and Japan.

“Our risk appetite indicator climbed to a 12-month high. Asset allocators are less pessimistic on equities, sharply cutting their underweight positions,” the firm told clients overnight.

Break out the bonuses and buy me a Porsche (second hand, of course).

Overnight, North America’s biggest newsprint maker, AtibitiBowater, collapsed and shuffled off into bankruptcy with debts of $A3 billion or so, and the country’s second largest shopping mall owner, General Growth, failed with around $40 billion in debt as it and 158 or its 200 or so malls went into Chapter 11. The implications were ignored.

In fact there’s a touch of early 2007 and early 2008 about some of the commentary and analysis. Yes there are sign of the US economy steadying, at very, very low levels of demand, yes China seems to be doing the dame and so does Japan. But Europe is looming as the new black hole.

But the reality is now that the intensifying impact of the recession on sales, cash flows and debt is overtaking that of the credit crunch, although stabilising the banks and the still sinking (foreclosures soared again in March) US housing sector. The fear of deflation is starting to creep back into thinking in the US, Europe and the UK, while it is gripping Japan and China.

The IMF warned this morning this is going to be a very nasty recession and the recovery will be tepid at best, so those betting on a V or a U should really be punting on an L.

The IMF warned that the recession is likely to be unusually severe and the eventual recovery will be sluggish.

It said in a report published on its website, the analysis of past recessions and their recoveries makes for “sobering” reading, and commentators are correct in comparing the current downturn with that of the Great Depression.

Last month, an IMF report predicted the world economy would shrink for the first time in 60 years in 2009 — by as much as 1.0% — while it expects a modest recovery of between 1.5% to 2.5% growth in 2010.

The IMF said “the current downturn is highly synchronised and is associated with a deep financial crisis, a rare combination in the post-war period. Accordingly, the downturn is likely to be unusually severe, and the recovery is expected to be sluggish.”

“A return to steady economic growth depends on restoring the health of the financial sector. One of the most important lessons from the Great Depression, and from recent episodes of financial crisis, is that restoring confidence in the financial sector is key for recovery to take hold.”

The IMF publishes its update World Economic Outlook next Wednesday and the news won’t be good.

That’s why the recovery in US banking is important. Overnight JP Morgan Chase, the second biggest US bank, reported better than expected first quarter earnings of just over $US2.1 billion, but write-offs, losses, bad debts and provisions soared 97% to $US10 billion as the impact of the recession on its business, retail and credit card businesses soared.

The costs and bad debts from the takeover of Washington Mutual last year didn’t help. Its dodgy assets bought with the Bear Stearns bailout are being underwritten by the Fed. Credit card loss rates are now running at near record levels.

The provision for credit cards was the biggest part of the $10.1 billion: $US4.7 billion, an increase of $US3.0 billion, or 179%, from the prior year. That’s the reality of the slump, and it’s going to get worse as the provisions include money set aside to handle an expected escalation in losses this year off the back of rising jobless numbers, more home loan losses and credit card defaults. So much for the sustainability of green shoots.

Figures out overnight showed that home foreclosure activity in the US jumped sharply (and worryingly) in March and the first quarter of 2009 to their highest levels on record as banks lifted halts on filings.

Total foreclosure filings — which include default papers, auction sale notices and repossessions — reached 803,489 in the first quarter, according to a report released Thursday by RealtyTrac, the online marketer of foreclosed properties. That is a 24% jump over a year earlier and a 9% increase compared to the December quarter. Of those filings, 341,180 happened in March — a 17% increase from February and a 46% jump from March 2008.

But there were green shoots: claims for US unemployment insurance unexpectedly dropped last week and single-family housing starts stabilised in March, providing more evidence that the intensity of the slump is easing.

Initial jobless claims fell 53,000 to 610,000 in the week ended April 11, the smallest total since January. But there was a downside: the number of people collecting jobless claims for four weeks or more jumped to a record 6.02 million in the same week.

New home starts totalled an annual rate of 358,000 single-family homes in March, unchanged from February, but multi-family dwelling starts fell, but they had jumped sharply in February to produce the surprise rise. That was responsible for the 11% fall in total new starts in March.

But to give that ‘green’ news some extra context, building permits (future home starts) fell 11% in March, to be down 45% on a year earlier and total starts were down 48% on the same month of 2008, so if it is stabilising, it is at a very low and highly recessed level.

The Philadelphia Fed’s general economic index increased to minus 24.4 this month from minus 35 in March as the fall off in new orders slowed. That was similar to the details in a report from the New York Fed for manufacturing in and around New York State.

But in Europe, big worries: there’s little sign of any easing, no matter how hard analysts search the fields and forests of the 16 member countries of the eurozone, there’s nothing remotely green, even limeish.

Industrial production in the 16-country region fell 2.2% in February, after a 2.4% fall in January, to be down 18% over the 12 month to February. That’s far deeper than the US where the fall is around 12%-13% annually. It’s starting to match the annual falls in Asia. Because manufacturing is a much more important part of the European economies than in the US (it is the heart of Germany), the news is glum indeed.

Despite heavy government spending on car scrapping plans in Germany (registrations up 39% now in March) and now France and Italy to boost demand for cars, there’s a problem looming. That’s hurting other areas of retailing and building up to an almighty collapse in 2010 when the current scrapping schemes end. The UK is tipped to follow next week with a scheme of its own.

And, like China, the US and Japan consumer and producer prices are falling, or weak at a core level, indicating that those lingering fears about possible deflation will hover for some months to come.

Peter Fray

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