Putting in a bottom (2)

The markets continue to heal, albeit slowly. As this chart shows, the VIX has fallen significantly from the highs that coincided with equity market lows. Swap spreads have been working their way lower from their highs of early October. 2-year Agency spreads have fallen by half from their Nov. 20th high. The dollar is looking very toppy here, having fallen today back to levels not seen since Oct. 21st.

Lower volatility, lower spreads, a weaker dollar and stronger gold all suggest that the Fed's injections of liquidity and Treasury's interventions have made a difference; market confidence is returning, and dollars are becoming less scarce and more abundant. The equity market appears reluctant to buy into this story of improving fundamentals however, perhaps because the resolution of the Detroit crisis is still up in the air, and the news continues to highlight economic weakness all over the globe. Plus, T-bill yields remain at zero, so we know the market remains terrified of the unknown dangers that might show up around the next corner.

Nevertheless, tension builds—between improving fundamentals on the one hand, and market pricing that discounts just about the worst scenario anyone could imagine on the other. My enduring belief in the ability of the U.S. economy to surprise its skeptics remains firm, though, so I think we'll see a positive resolution to this before too long.