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.

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.

The old adage - there is no better time to go back to school than during a recession - seems to ring true for real estate investments as well.

With recession-wary workers and rising international interest driving up university applications, student home operators in the UK are enjoying near 100 percent occupancies, with rents predicted to go up 10 percent this year.

In contrast, other property classes in the UK such as offices, shopping malls and factories have seen values plunge a startling 45 percent since mid-2007. And the recession means rents are forecast to fall as much as 15 percent this year as landlords face the rising threat of tenant defaults.

As I wrote earlier, investors such as pension funds that were burnt by traditional commercial assets are now turning to the student accommodation market for the projected growth and steady returns other parts of the market aren’t delivering.

Students pack up their dorm room after graduating from university in the city of Xian, Shaanxi Province July 3, 2004. REUTERS/China Photos WC/FA

Student homes specialists King Sturge estimates that average rents jumped 7 to 10 percent annually in the last five years and can go up 10 percent this year, although it sees the yearly increase moderating to 5-7 percent for the next few years with new entrants to the market.

Branded student housing can be very pricey and the best stuff are a far cry from crowded, slum-like dorms that some of the world’s students have to put up with: high-end versions in London that offer en-suite bathrooms, flat-screen TVs and laundry services cost up to 300 pounds a week.

With the belt-tightening that comes with a recession, parents may groan about the higher costs of student housing for their university-bound offspring.

But operators expect there will be those who are still willing stump up the cash, if only to ensure their children make it for classes.

“First year students usually can’t find housemates to rent with, and there is no guarantee the flat will be near to school,” says Gabriel Behr of the University Partnerships Programme, a student homes operator owned by funds under Barclays Private Equity, which is developing over 700 new rooms for King’s College London.

“Are parents willing to stick their kids somewhere five miles away from class?” he asked me.

Berlin is slowly but surely establishing itself as one of the top global catwalks for the bold and the beautiful of the world of high fashion – and the global financial crisis seems to be doing nothing to slow it down.

For the fifth time, up-and-coming fashion designers are meeting in the German capital to present selections from their latest collections at the Berlin Fashion Week, which is attracting increasing interest from the international fashion scene.

Maia Guarnaccia, vice president at IMG Fashion Europe, which organises the fashion week in Berlin as well as similar events in New York, Miami and Amsterdam, said last year marked a turning point for Berlin.

“Since July (last year) people are now calling us to be here,” he said, adding that it used to be the other way around.

“Berlin still is an oasis,” Guarnaccia said. “Because it is more accessible” than other fashion capitals like Paris, London or Milan, where the cost of living as well as production and rents are a lot higher, he said. This, he said, attracts young designers especially in a time of global economic recession.

“People get more creative in times of a crisis,” he said, having also worked for British fashion designer Vivienne Westwood in the past.

One of the fast-rising stars is designer Pablo Ramirez. Born in Buenos Aires in 1971, Berlin marks one of his first international shows.

“Berlin is another important door to Europe,” Ramirez said after the show. He was invited to come to Berlin after winning top fashion awards in Argentina. “I’m very nervous and excited,” he said.

His summer 2010 collection featured mainly elegant black dresses and suits and was accompanied by almost melancholy sounding strings.

It was followed by a bright, colourful and upbeat show by South African designers Jacques van der Watt and Danica Lepen with their Black Coffee label — which featured red, blue and red silky smooth wrap-around dresses adorned with golden laces.

A few minutes walk away from the main venue, another show launched in a big white tent set up at the heart of the city, next to the opera house. The German natural clothing brand Hessnatur show is the latest collection with other ecological designers in several rooms of Berlin’s famous Adlon Hotel. 

Hessnatur was founded more than 30 years ago by environmentalist Heinz Hess and won over designer Miquel Adrover as creative director in 2007. Hessnatur decided to show in Berlin after his gig at last year’s the New York Fashion Week triggered a wave of media interest. “Requests have risen brutally,” said Chief Executive Wolf Luedge.

Why so busy? Well, actress Julia Roberts recently ordered some clothes for her next movie and Vogue just did a photo shooting with Cameron Diaz wearing Hessnatur’s frocks.

While the future looks bright for the company, there is still a great deal of uncertainty. Hessnatur is part of German retail and tourism group Arcandor which filed for insolvency last month.

Luedge could not say what would happen to his company now, but said: “Hessnatur will come out of this one unharmed. I am not worried. Not at all.”

IMG’s Guarnaccia added more optimism. Berlin would make its way, he said: ”The success will be a blend of German brands, established designers and newcomers.”

While nobody would be rash enough to predict the end of the economic downturn, there are certainly increasingly loud murmurs that the bottom of the stock market fall may have come.

Battered share prices have become so cheap that the pound signs are beginning to light up in the eyes of investors as they pile back in, and it’s smallcaps that are really shining. You only have to look at the numbers, companies like biotech firm Alizyme doubling at the end of last week and engineer White Young Green tripling.

What has happened of course is that as buyers come back to the market, they are finding a shortage of sellers, pushing up prices. Because the hardest hit shares are the ones that will bounce the hardest, it is the higher risk smaller end of the market that is seeing prices increase most steeply.

The FTSE’s Small Cap index has rocketed by a whopping 23 percent in the past month, dwarfing the 6 percent rise booked by the FTSE 100 in the same period. As long as there are no nasty surprises in company earnings this week, then we may well start seeing investor confidence trickle back.

For all the designer drinks and gourmet foods - from raw oysters to sushi, and the sea of men in expensive suits and bejeweled women in elegant gowns, the setting seemed fit only for celebration.

But dressed as they were to the nines, investors attending "A Night with the Bears" at Toronto's upscale Elgin Theatre, were eager to hear the worst, on the edges of plush seats amid predictions of market doom from some of the continent's savviest
financial minds.

"I only wish we'd sold tickets," said a smiling Eric Sprott, arguably Canada's best known hedge fund manager and chairman at Sprott Asset Management Inc, as he looked out at the 1,500 or so crowd.

In a media room below stage, journalists were held equally rapt by the star speakers after being treated to a hand-operated elevator ride.

Once there, rows of chairs slowly filled as smartly-dressed servers roamed the dimly-lit space
offering drinks to journalists briefed quickly.

The message?

When an economic recovery takes place -- and it won't take place any time soon -- it's going to be a weak and shallow recovery.

"Still negative growth, still the worst recession we've had in the last 60 years, still the worst financial crisis since the Great Depression, still even many of the largest banks are going to be found insolvent," said Nouriel Roubini, a professor of economics at the New York University's Stern School of Business, who rose to celebrity status after sounding early warning signs about housing bubbles and the credit crisis.

Later, experts on stage predicted bank failures and harsher times unless back-to-basics medicine is applied to cure a U.S. economic "pneumonia" that spread to the rest of the world late last year.
"There's a buyer's strike and the market is not coming back," said Meredith Whitney, a Wall Street veteran of more than 15 years and one of it's most bearish bank analysts. The groan from Torontonians was audible.

Canada's financial system, for many years criticized for being heavily conservative, is now credited for being among the world's soundest and most resilient to the global crisis.

Canadian banks are routinely ranked as the world's most solid, having remained profitable despite a crisis that pushed many U.S. and European institutions to the brink of insolvency.
Whitney predicted U.S. banks will need to start raising capital by selling hard assets, and advised investors to "stay tuned" for opportunities.

Roubini, introduced to the audience by his nickname "Dr. Doom", appeared a tad irritated by the moniker, but not enough to change his tune.

"I don't think I'm too bearish," he told reporters. "I am more a realist rather than a pessimist."

"I'll be the first one to call for the bottom of this economic contraction, recovery of the market when I see a sustained economic and, therefore, financial recovery. I don't define myself as a permabear."

He says he can't be too bearish because he thinks all the massive stimulus measures and rate cuts around the globe will eventually kick in to avert an "L-shaped" near-depression like the one Japan experienced.

He described the U.S. recession as three times as long and five times as deep as the last, and warned a recent stocks rally was just a precursor to another fall.

"For the first time in more than 60 years we have a global, synchronized recession."

(Additional reporting by Jennifer Kwan)

Japanese stocks are sinking towards levels unseen since 1982, sending alarmed government officials scurrying to come up with some way of propping them up.

 Officials are looking at steps to support stocks after the plunge, which has taken the benchmark Nikkei to within sight of a 26-year low hit last October.

That slices into the value of huge share portfolios held by Japanese banks and erodes their capital just when the economy needs them to boost lending.

Among proposals being considered is setting up a stock-buying agency as Japan did in the mid-1960s, which follows another plan for the government to buy up to 20 trillion yen in shares from banks -- a plan currently stalled in parliament.

The latest suggestion, in a newspaper on Thursday, is for the Bank of Japan to be pushed into buying stock exchange-traded funds.

Though market players say stock buying by government agencies might help a little, most remain wary with the Japanese market slide part of a global criiss.

"These stock plans may buy a bit of time, but without enacting a decisive economic stimulus package simultaneously they won't be really effective," Takahiko Murai, general manager of equities at Nozomi Securities, told me.

Others are harsher, noting the dire economic state and paralysis in a divided parliament under unpopular Prime Minister Taro Aso, with an increasingly strong opposition determined to delay policy as it eyes an election soon.

"We don't need more money," said one fund manager. "We need a change of leadership."

The Nikkei gave all the proposals a cold shoulder and edged down on Thursday, bringing its losses -- after the worst post-War decline ever last year -- for calendar 2009 to more than 15 percent, on top of a record 42 percent slide last year.

Photo credits: Kim Kyung Hoon

U.S. stock indices hit an 11-year low on Feb. 23, as stocks continued their sharp decline from the peak of 2007. This chart looks at some key events that helped to drive stocks down over the last 16 months.

U.S. stock indices hit an 11-year low on Feb. 23, as stocks continued their sharp decline from the peak of 2007. This chart looks at some key events that helped to drive stocks down over the last 16 months. Warning: This may cause post-traumatic flashbacks in some investors.

1 - Oct. 9 2007
U.S. stocks rose to record highs on speculation the Federal Reserve was on course to cut borrowing costs further to revive economic growth. The Dow Jones industrial average climbed 120.80 points, or 0.86 percent, to end at 14,164.53, a record.

2 - Oct. 19 2007
Caterpillar Inc.’s warning that the housing slump was infecting the wider economy sent U.S. stocks tumbling by the most in more than two months, in a drop that was made more unnerving as it marked the 20th anniversary of the 1987 market crash.

The Dow fell 366.94 points, or 2.64%, to end at 13,522.02.

3 - Feb. 5, 2008
U.S. stocks suffered their biggest drop in nearly a year after the Institute for Supply Management’s non-manufacturing index data showed the worst monthly contraction in the services sector since the last U.S. recession and Standard & Poor’s warned it could cut bank credit ratings.

The Dow had its biggest drop since the indicator was created in 1997, down 370.03 points, or 2.93 percent. Settling at 12,265.13, the index was at its lowest level since October 2001, aggravating fears that a recession was at hand.

4 - June 6, 2008
U.S. stocks extended losses as surging oil prices fueled inflation fears, adding to concerns sparked by a government report that showed the unemployment rate had its sharpest rise in 22 years in May.

The Dow fell 3.13 percent to close at 12,209.81

5 - Sept. 29, 2008
Stocks tumbled after the U.S. House of Representatives voted against a compromise bailout plan that would have let the Treasury Department buy toxic assets from struggling banks. House Republicans, in particular, balked at spending so much taxpayer money just before the Nov. 4 U.S. elections.

The Dow fell 6.98 percent to 10,365.45 points.

6 - Oct. 15, 2008
Wall Street had its worst day since the 1987 stock market crash, as bleak economic data fed worries that efforts to unlock credit markets might not stave off a severe recession. Federal Reserve Chairman Ben Bernanke added to those concerns when he said the economy faced a “significant threat” from paralyzed credit markets.

The Dow fell 7.87 percent to 8,577.91.

7 - Dec. 1, 2008
U.S. bank stocks suffered their biggest one-day decline in the current financial crisis, on expectations a deepening global economic slump would reduce employment, crimp access to credit and spur more writedowns.

The Dow fell 7.7 pct to 8,149.09

- Chris Sanders

Shampoo, margarine and medicine - surely some things will be okay in a recession?

Unfortunately, the concept of defensive stocks is taking a big knock along with so much else this time round. Companies making the stuff are themselves no longer certain what the future holds.

Unilever’s decision to scrap its financial targets sent its shares skidding this week and raised the spectre that more companies may follow suit.

So far, U.S.-based groups such as Procter & Gamble, Kraft and Sara Lee have trimmed their guidance rather than abandoned it. But some analysts think other consumer goods powerhouses in Europe, where the tradition of giving clear earnings guidance is less well-rooted than in the U.S., might copy Unilever in throwing in the towel.

Nestle, Danone and Reckitt Benckiser all report results in the next two weeks.

At the same time, the world’s second largest drugmaker, GlaxoSmithKline, is also giving up the practice of guiding the market on profits.

Glaxo insists the move is all about focusing management and investor sights on the long-term. But its decision is bound to leave investors uncertain about what the future holds for the supposedly ultra-defensive pharmaceuticals sector, where global recession coincides with an unprecedented “cliff” of patent expiries.

One consolation for investors - if not staff - may be come in cost cutting. Both Unilever and Glaxo have been ahead of the curve in improving efficiency in their operations in the good times; now both plan to drive their savings programmes even harder.

Merrill Lynch economist David Rosenberg's views are well-known for bearing no resemblance to his firm's trademark bull, so when he says European clients seem too upbeat, what he really means is they weren't thoroughly depressed. The New York-based economist just got back from a marketing trip across the Atlantic and didn't find much common ground.

In particular, he said European clients seemed more concerned about inflation than the deflation that he sees coming, and they may have unrealistically high expectations for President Barack Obama.

"Unbelievably ... portfolio managers seem to think they are taking a bigger risk with their careers by missing the rallies than by missing the sell-offs," he wrote in a note to clients. "I can tell you that this is not a condition from a sentiment standpoint that terminates bear markets."

For the record, Rosenberg thinks the Standard & Poor's 500 index may have another 20 percent to fall, and U.S. house prices could drop an additional 15 percent. That would take the cumulative loss in U.S. household net worth to $20 trillion. Yes, trillion.

He said European clients had a "very high degree of confidence" that Obama would be forceful in addressing reflation, credit and the recession, and he heard frequent comparisons to Franklin Roosevelt.

"But the dirty little secret from the New Deal is that even by the end of the 1930s, the unemployment rate was still north of 15 percent compared to 2 percent when the Great Depression began, and the CPI was deflating at a 2 percent annual rate," Rosenberg points out.

And on inflation? He doesn't see that happening when unemployment is high and the manufacturing sector is saddled with 30 percent idle capacity. "Spare capacity in the economy is now so big that it would take six years of 4 percent real GDP growth or alternatively three years of 5 percent real growth just to get the economy back to full employment."

Aren't Americans supposed to be the irrationally exuberant ones?

- Reuters photo by Toby Melville