Coming out of one of the darkest recessions, have we learned the lesson at all? Or are we going to repeat the mistakes of the past again?

Khuram Maqsood, managing director of boutique corporate financing advisory firm Emirates Capital, thinks we may well repeat them.

He says a second wave in the downturn – if it comes at all – is unlikely to come from a new, unseen fault in world markets.

“The second wave’s going to come from exactly the same place the first wave came from --which is short attention spans, short memories,” he tells Reuters Investment summit in Dubai.

“Even in 2009 you’re beginning to see some of the issues that brought the global economy to its knees creeping up again, like executive pay for example.

“Again we’re beginning to see too much leverage seeping into different parts of the global economy, so it seems there are similar things which encroach back into the playing field and I think that’s the risk.”

Britain’s FTSE 100 seems to be almost impervious to any bad data that can be thrown at it. GDP data shocked the market showing the UK unexpectedly contracted in the third quarter.

Sterling tumbled more than a cent against the greenbackand gilts jumped while the FTSEurofirst 300 pan-European equity index trimmed gains considerably.

But Britain’s FTSE shrugged it off, hugging its 1 percent gains in the face of data which shows the UK economy is still ailing badly.

 It is the cosmopolitan nature of the FTSE which is keeping it buoyant. Miners and energy firms make up over 32 percent of the index, while miners banks, also very much global institutions make up a further 16 percent.

Howard Wheeldon on BGC Partners says:

“The FTSE is a function of globalalisation and trading conditions and growth elsewhere in the world have more of an impact than domestic growth. If the global recession is over and demand is picking up internationally, it’s all the more reason to close your eyes to
what’s going on in the tiny island that it happens to be registered in.”

The Dow Jones Industrial Average has recouped more than 50 percent of the losses from the October 2007 peak and the March 2009 bottom.

It’s been a remarkable rally, and the cheerleaders of the world’s major economies say it indicates a return of confidence to markets.

They say the world’s market rallies are based on galloping improvements in economic fundamentals, and this just eight months after many of them were predicting the end of the world as we know it.

It won’t have escaped history watchers, and perhaps a few others who need to get out more, that thus far, the rally looks and feels remarkably similar to the bear market rally after the 1929 Wall Street Crash.

It has been a low-volume rally, and a lot of cash is sitting on the sidelines.

Those holding the cash are either looking on enviously, waiting for a big correction in order to buy at lower prices, or they say they will remain in cash, reasoning that the fundamentals underlying the run up are far from solid.

True, corporate earnings are improving, but looking carefully, it is clear most of the improvements have been

achieved via cost cutting, mainly in the form of reducing staff numbers.

Unemployment is up sharply in most major economies, and many of those in work are working fewer hours and taking home less pay. Few, if any workers have even had a sniff of overtime in the past year.

In the U.S, personal saving has risen to 3 percent, and some commentators suggest it could reach 8 to 12 percent within two years as savers try to rebuild an asset base battered by the slump in housing and securities prices.

So in spite of the massive profits at JP Morgan and Goldman Sachs -- none of which, incidentally, came from

lending to businesses or consumers -- many are unconvinced that corporate profitability is on the road to recovery.

Moreover one or two problems still have to work their way through the economy, and through banks balance sheets. Commercial mortgages. Adjustable rate mortgages that are yet to reset. Credit card defaults.

Savvy investors are still trying to get some of the upside from equities, which still appear to be on a tear. They are however positioned cautiously, and ready to turn around their portfolios and flee to cash and gold (and perhaps large supplies of tinned food and a few automatic weapons) at the first sign of trouble.

Because if history is anything to go by, the lows of March were only the first act in this recession.

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

Five things to think about this week:

CENTRAL BANKERS IN A HOLE
– The global economy and financial system appear on the road to recovery but that is in large part due to unprecedented official stimulus that will have to be withdrawn at some point - the questions investors want answered are when, and how.  Central bankers no longer appear to be quite as shoulder to shoulder with one another on coordinated policy as they were last year in the aftermath of Lehman’s collapse.
 

CHINA STOCK WATCHING
–  It is August, liquidity has dried up with the summer holiday season in full swing, and investors are palpably more cautious about the economic outlook now than they have been for months. It is against this backdrop that that the Chinese stock market is emerging as the focal point and driver of all other asset markets. The Shanghai Composite technically slipped into bear market territory earlier last week, shedding 20 percent in the two weeks from Aug. 4 to Aug. 19 on profit taking from the 90 percent surge this year. There is no major Chinese economic data scheduled for release this week, leaving thin markets at the whim of sentiment in what is a notoriously volatile stock market.
 

GROWTH FOUNDATIONS
– The United States, Britain and Germany unveil revised estimates of Q2 economic growth. Revised GDP figures rarely garner much attention but with initial estimates from Germany, France and Japan earlier this month all showing that these countries exited recession in the last quarter, investors will be looking for further evidence the world economy has turned the corner. The hard data is stronger now than it has been for some time but is the global economy building a solid base for recovery, or is it more likely to buckle were authorities to begin withdrawing the massive fiscal and monetary stimulus?
 

ABNORMALLY NORMAL MONEY MARKETS
– A veil of normality continues to cloak interbank money markets, with Libor at record lows and some closely-watched measures of money market health like Libor/OIS spreads and the TED spread almost back to levels seen before August, 2007. But that is only thanks to authorities’ liquidity injections, guarantees and asset purchases worth trillions.  Banks have hoovered up this free or ultra-cheap money but still are not feeding it into the real economy, with lending to business and households still patchy at best. Euro zone M3 money supply figures for July are expected to show another slowdown in the rate of growth, to 3.3 percent on the year from 3.5 percent in June.
 
SAFE AS HOUSES?
– Figures will show how the U.S. housing market, the epicentre of the global financial crisis, is faring four and a half years on from its peak. The Case/Shiller house price index is expected to show the annual pace of price declines slowed again in June, fuelling the belief that the market has bottomed.  But the number of foreclosures is high as the U.S. labour market remains weak, and the national housing market stock remains high by historical standards. Economists say there will be no sustainable recovery of the financial system and economy without a durable recovery in the US housing market.

Investors have been forced to contend with a severe pullback in consumer demand and the panic that overtook the banking sector in late 2008.

Since March, stocks are up by nearly 50 percent and investors have shifted into riskier fixed-income assets as well, but whether these rallies continue will hinge on whether investors are drawn to those purchases, not whether they're forced into it because nothing else looks attractive.

That's how Mohamed El-Erian, chief executive at bond fund manager Pacific Investment Management Co., put it when speaking with Reuters Television earlier today. He noted that investors in longer-dated Treasuries were moving in that direction, in part because of the desire by authorities to move them away from short-dated risk.

"The question is not whether you can be pushed, but whether you can be pulled," he said. "What makes a rally sustainable is whether you can be pulled into more risk."

That may seem like a distinction without a difference, but the motivating factor is important to consider: When investors feel flush with liquidity and perceive opportunities for growth to be strong, they're more likely to hold investments in riskier assets, rather than fleeing swiftly to short-dated debt that poses little risk. The push-pull argument seems to allude to the phrase, "pushing on a string," in that there are certain things that cannot be pushed on.

With the prospects for growth muddy, many believe the stock market is due for a course correction after the post-panic run-up - and why Treasury auctions continue to draw strong demand.

El-Erian's colleague, Bill Gross, pointed out the knotty problem facing U.S. markets in his most recent commentary, saying that "but a modern capitalistic economy based on levered financing and asset appreciation cannot thrive if its ‘return on capital' or nominal GDP suffers such a significant shock."

And a shock it has suffered. Look no further than the news from Lowe's Monday, as the company cut back expansion plans due to weak demand.

The middle part of this decade made desire for investment - being pulled into growth opportunities - easy. Cash was flush, prices were going up, and few worried about leverage.

But the economy is in the midst of the painful, ongoing process of deleveraging, one that does not happen quickly. Economists at Goldman Sachs expect second-half growth to rise to about 3%, but then project early 2010 growth to decline to about 2%, and the square-root recovery (a long, drawn-out period of stagnation) appears likely.

With that in mind, there may be more pushing than pulling in coming months.

It used to be that Citigroup was one of the market's most important stocks, if not the most important. At the nexus of the banking, securities and lending industries that benefited most from the easy-credit boom of the middle of the decade, its success as a stock mirrored the market and the economy.Somewhere around 2006, when people started to call for a breakup of the company, it was supplanted by a company even more tied to the derivative-fueled mess that masked the holes in the economic landscape - Goldman Sachs.

But Goldman continued to earn massive profits while Citigroup nearly died a painful death. Shares eventually fell to less than $1 a share, it was kicked out of the Dow and investors started to view other consumer banks as better indicators of the market's health.

Still, there's a chance that Citigroup may become more important once again, provided it survives (with substantial help from the government). Kevin Depew, recently writing on Minyanville.com, noted that most of Citigroup's short-term debt has returned to spreads present before the blowup of Lehman Brothers, suggesting that bond investors believe the debt crisis has receded. He notes (using a bit of technical analysis) that "Citigroup right now might again be The Most Important Stock in the Universe."

But one could argue it never stopped being important . It's clearer now that those in search of a proxy for the economy, investors should have stuck with Citigroup all along. (Not that they should have stuck with owning the shares.) Its plunge came at a time when many thought a second Great Depression - or something close to it - was on the way, and its status as a ward of the state mirrors the economic situation as well: second-quarter GDP would have been worse had it not been for government spending.

Shares of the stock continue to struggle. It trades at less than $4, but the company recently saw a boost in trading volume as a result of an increase in its influence in the S&P 500. This may increase again if certain preferred shares held by the government are converted to common stock and then end up in the public's hands.

The market can't be blamed for ignoring Citigroup, washing their hands of it as it slumped.

But Citigroup never stopped being a bellwether for the economy. Its likely path in the next several years: slower growth, forced reduction of leverage, and government help, is the one the broad economy is likely to follow.

Eventually, when the banking system is smaller, and has delevered, and consumers and businesses have pulled out of the mountain of debt piled on over the years, Citigroup will be just another company. Until then, the health of the economy is the health of Citigroup.

MacroScope is pleased to post the following from guest blogger Julian Chillingworth. Chillingworth is chief investment officer of UK investor Rathbones. He questions here whether Britain will face a second downturn shortly after struggling out of recession.

Are we likely to witness a two-tier recession in the UK?  Perhaps not a recession but certainly a secondary downturn. A vast number of people have enjoyed lower mortgage payments and a level of job security, but will this last?

The UK is in somewhat of a unique position in so far as it faces a regime change, with some obvious ramifications for policy.  However, whoever takes the seat (most likely the Tories) must still cut back public expenditure and raise taxation, both within the context of high unemployment.

It will require the wisdom of Solomon as a further rise in unemployment hits tax-take and results in rising social security payments. Who would want to be George Osborne?!

Key will also be the state of the financial services industry, the banks – other G7 nations do not have the ‘core component’ element to deal with in this respect – and the consumer won’t be moved in any meaningful fashion until there is real evidence of stability there.

Economic news is improving, but in the near term sentiment will be led by the direction of earnings.

The bottom line is the US might be troughing out, but this time round, we in the UK could be on our own for a little while longer.

Sure, things look rosy for Goldman Sachs (GS.N), but the firm hardly represents the broad U.S. economic situation, as investors are looking over a mélange of lousy data, with dribs and drabs of mildly encouraging information in the mix.

Tuesday's retail sales figures weren't all that great - the strength comes from auto sales and rising gasoline prices (and rising gas prices aren't exactly great for consumers) - and Wednesday's data on capacity utilization and energy inventories are likely to confirm the ongoing slack in the economy.

So what to make of the statements from CSX Corp. (CSX.N) chief executive Michael Ward, who told Reuters the worst of the recession has been seen? Data on capacity utilization doesn't suggest a pick-up in demand, and the giant inventories of distillate products in various parts of the country also suggest the economy is sputtering, not chugging.

Weekly data on energy product inventories will be released Wednesday. Notably, distillate stocks - that's diesel fuel, jet fuel and heating oil - were at 158 million barrels as of the July 3 week, or about 55 million barrels above normal. Of particular interest is the inventory of low-sulfur diesel located on the western U.S. coast. Refining production has been in decline here over the past year, but inventories have not been drawn down to any great degree.

In a strong economy, stocks would likely fall - but they're not, despite declining refinery output, because of slack consumer demand for imports that come into Pacific ports. "If we're not seeing a material drawdown in supply, I would think that's indicative of weakness in overall demand in the market," says Stephen Schork, who writes the Schork Report, an energy market newsletter. "We're simply not manufacturing this stuff right now."

Data on rail traffic is no more encouraging, with North American rail freight down 20 percent in the first half of the year when compared with 2008. Ward of CSX predicted that third-quarter volumes will fall by double digits, but the pace of decline will be lower than this quarter, when it reported a 21 percent drop in freight volumes. So we're back to the second derivative again - the rate of change may be improving, but the underlying numbers are still negative. Another quarter or two, and we'll see if the economy is picking up steam, or if Michael Ward was blowing smoke.