Pat, I'll Take the Letter V.

Okay, you may be wondering why I suddenly fell in love with Wheel of Fortune. That's simply not the case here. Game shows are a part of American culture as is "lack of reality" shows and soap operas. To each his own. As will be explained in the coming paragraphs, you and I would definitely prefer the letter V to the letters U or L.

Thoroughly confused - please don't be. The above is a simple analogy that many "finance geeks" use to describe a market turnaround. Last fall, many of the experts called for a letter L - in other words a sharp downturn followed by a long and pronounced bottoming. As we moved into Jan-Feb 2009, these same people began changing their tunes and predicting more of a U - a sharp downturn, a flattening market followed by a rapid increase.

Over the last three weeks, there has been a sudden uptick in the number of financial analysts who are calling for a V shaped recovery. In this scenario, markets experience a sharp decline, but there is little bottoming out. They essentially "bounce" off the bottom and begin an almost equally rapid ascent. Since March 9th, global stock markets have gone up between 20%-30%. That is not to say we are out of this mess yet. On BNN on June 10th, Gerry Brockelsby, partner, Marquest Asset Management provided one of the best explanations of the different "letters" of market recovery. He expects a "snap back" of the recovery in the short term (next 6-24 months). The longer term presents another set of problems (mentioned in a previous blog or two) as inflation raises its very ugly head.

The longer term recovery of markets is threatened by the excess liquidity in the system. This eventually creates traction in the economy and as he states, we are already seeing the benefits of the low interest rates and stimulus packages introduced globally. Inflation is not a problem now. You cannot have an inflation issue until you have an economic recovery. Once the recovery takes hold, then the various economic powers need to be begin the complicated process of "withdrawing liquidity" from the system. If you take the funds out too slowly, it leads to rapid inflation. If you remove the funds too quickly, then we face an interest rate problem. Either one of these issues could lead to another significant market decline. Let's hope that the economic "leaders" get it right this time, or we could go back down through a similar market trough.

As always, Stay Well and Pay It Forward.