Mr. Market (global asset markets) has been true to the manic-depressive characterization Benjamin Graham put forth six decades ago. He appears to be lurching between two opposing views. The first is that upon us is a recovery that will drive growth and consumption, leading to runaway inflation and dramatically higher interest rates. “Quick, sell the U.S. dollar. Increase your commodities exposure!” he warns. On other days the opposing view is in vogue, “Deleveraging will continue for years bringing below-trend growth and deflation.”

Many economic indicators in the U.S. and around the world have been steadily improving throughout the second half of 2009 supporting the first, more bullish view. Critics rightly contend, though, that we really don’t know the true health of the economy because of government stimulus which is both artificial and temporary. Thus, we don’t yet know which of Mr. Market’s views are correct.

Two North American employment reports were released last Friday. The U.S. unemployment figures were widely reported and showed a decline of 0.2% to 10.0% for the month of November. The second, receiving less attention in the press, were those of Canada which showed a 0.1% drop to 8.5% but substantially more job growth. This week markets are ready to call an end to low interest rates and are speculating again on the timing of the rate hikes from the U.S. Federal Reserve.

Contrasting the report with that of Canada reveals some of the weakness in the U.S. version. There are some reasons for cautious optimism on global recovery but not because of the U.S. unemployment report. Unfortunately, rate hikes (which many Asian nations would like to see) are likely to be tied to true job creation.

In assessing the U.S. housing market as I do each month, there are many lenses through which to look. Back in March I wrote that the housing market would soon see a bottom in the various sales rates. This has happened. Last month it was clear that housing was technically no longer a drag on the U.S. economy but that the market is only being sustained by heavy government intervention.

Today sales rates are up more than 30%, inventories have been cut anywhere from 22% (existing homes) to 54% (new homes), and interest rates are back to historic lows of April. By almost all measures, the worst of the U.S. housing crisis has passed. Yet if the housing market is so healthy all of a sudden, then why are there so many foreclosures looming out there?

In the two months since I discussed the Baltic Dry Index (BDI), the index has rebounded strongly including having set new 12 month highs in the past week. Through much of 2009, the story of the Baltic Dry Index has been one of Chinese iron ore purchases. Recently, in a positive sign for the real economy, other factors are starting to play a role. As we will see below these Chinese purchases have not abated and remain a key factor. To that factor, though, we can add two more.

One big question on investors mines recently is how much of the market activity reflects true improvements in the real economy and how much is simply a result of cheap money flowing around the globe creating asset bubbles. Unlike indices that track asset markets of equities and real estate or recently popularized asset markets of oil and gold, the Baltic Dry Index reflects activity in the real economy. The index tracks rates for dry goods shipped in bulk around the globe. For a detailed explanation of the index please see my article from September.

With the APEC summit held last week in Singapore making many headlines, issues of trade deficits and currency valuations are in the news quite often. Various governments and non-governmental organizations have warned strongly against what the IMF says are “global imbalances.” In its World Economic Outlook released last month, the IMF forecasted a return to growth of these imbalances and the latest global trade data seems to confirm the trend has begun. As I pointed out last month, trade had been trending flat of late, bad for global GDP but good for correcting trade imbalances.

As China’s role in global economics continues to increase, the term “G-2” has been coined to refer to the U.S.-China relationship. It is a play on the terms for the economic summits known as the G-8 (Group of Eight) and G-20. Increasingly, the world is taking its cue from this duo but that leading appears to be little more than status quo.

Last week, we saw a number of positive indicators in the global economy. Australia became the first major economy to raise interest rates causing the Aussie exchange rate to strengthen above $0.90 against the U.S. for the first time since August 2008. (Actually, Israel was actually the first to raise rates, but this was less notable.)

U.S. retail sales for September came in better than expected and Canadian unemployment dropped to 8.4 percent. Unfortunately, one key indicator of economic activity, global trade, remains off anywhere from 20% to 40% and trending flat at best.

At the headline level, the United States housing market lost some momentum in the data released last month. I described in last month’s article how July data was almost universally positive, prompting the question of how sustainable the recovery might be. Despite a drop in the latest August figures for existing home sales, there are good reasons to believe the momentum in housing will continue at least for a few more months.

While foreclosure prevention efforts by the U.S. government have amounted to virtually nothing, the first time home buyers tax credit has been effective. This tax credit which was part of the federal government’s $787 billion stimulus program is set to expire at the end of November 2009. We shall see what happens after that point. At a minimum, the momentum should continue until then.

Last Friday, the Baltic Dry Index ended the week on an up note at 2,183, finally. It was the first up day in 10 sessions. In fact, the 7.3% decline for the week was the ninth weekly drop in ten weeks. In the last three months, while global equity markets have rallied on increasing expectations of global recovery, the Baltic Dry Index (BDI) has quietly, steadily declined. Since its peak this year on June 3, 2009 at 4,291, it has declined 49%. The S&P 500 Index in the United States, for example, has increased 13% in the same time frame.

This is important because unlike asset markets, this Baltic Dry Index measures economic activity that is supposed to be at the heart of the economic recovery. The index reflects the demand for, among other things, transporting iron ore and coal from Australia to China that is a direct input to Chinese industrial production topics I have discussed in past articles. Much of justification for a recovery, particularly in commodities prices, is linked to Asia-related trade and consumption. Yet if this trade and consumption was so robust the BDI should be headed up (or at least holding flat) rather than in retreat.

Are we headed back to the heady days of 2007 any time soon? That seems to be the dilemma that markets are wrestling with. One look at the commodities markets would have you think we are. However, with the global deleveraging cycle underway and expected to continue for many quarters, if not years, there are many reasons to believe we are not.

After careful analysis it seems to me that U.S. numbers are misleading but Japan’s figures are revealing (if only about its trade partners). With so much cheap money sloshing around the system it is critical to regularly ask – is it time to worry about inflation?

Well, it's official. The negotiations for iron ore annual price contracts have concluded between Chinese steel mills and Australian miners. I highlighted this issue in my March article describing a drop of up to 40% in iron ore prices (and even larger cuts in coal prices) at a time when other commodities prices like copper and aluminum were on the mend.

The financial outcome was as predicted – a 33% cut in contract prices for iron ore and close to 60% drop in coal prices. The unusual path the negotiations took was anything but predictable. It speaks volume about the struggle for power between resource hungry Chinese manufacturers and global commodities producers. Rio Tinto (RTP) has called off the negotiations for the year, in part, because their negotiation team is now under arrest in China.

For many weeks now I have been interested in researching the Canadian energy industry. It is not that I believe oil prices should be going up any time soon. In fact, as I wrote three months ago, oil fundamentals are quite weak. Since then, oil prices have marched ever higher but concern over trading prices being disconnected from fundamentals is becoming a fairly mainstream position of late.

Whether prices go up from here or (as I believe) they take a precipitous fall before eventually heading higher, the long term demand for energy is undisputed. Even in the presence of alternative energy sources, more sources of oil will be needed, if for no other reason than tp replace existing production as it is depleted.

I want to be the first to admit that last the conclusions from last week’s article on global trade were wrong. The U.S. has been the first of the major industrialized countries to see its international trade of goods stabilize. Most others have been seeing their trade figures slide further in May and June. However, the release of second quarter GDP figures from Europe last week and Japan yesterday clearly disputes the conclusion that recovery from the recession will be on a first-in, first-out basis.

Recession timing can be a tricky thing to pinpoint which is why in the U.S. a whole committee of economists at the National Bureau of Economic Research, the NBER, waits more than a year to announce their official conclusions. For the rest of us, the most broadly accepted definition is two consecutive quarters of negative growth in GDP. By this definition, the recession ended by 2Q’09 in countries like Japan, Germany, and France while it continued on in the United States and the United Kingdom.

From the enthusiasm of the equity markets in the last few months, one would think that the global economy has gotten back onto its feet. In my last look at global trade, the U.S. had been showing signs of stabilizing at about $200 billion per month. Through the first five months of the year, exports of U.S. goods are down 22% to roughly an $80 billion monthly rate while imports have dropped more than 30% to a rate of $120 billion per month. While the U.S. numbers appear to have stabilized including an uptick in June, trade figures for other industrialized nations have declined since March.

A return to ‘normal’ trade levels is far away but movement towards those levels has both positive and negative implications. On the positive side, it is a reflection of economic healing both in the U.S. and abroad. On the negative side, it is likely a return to chronic trade deficits that weaken the U.S. dollar and increase the holdings of U.S. debt abroad. For better or for worse, the June trade figures released today point to a solid stabilization in trade if not the beginning of a recovery but no such trend is evident elsewhere.

How can this be reconciled with asset markets (stocks and commodities) in an upward trend? First asset markets are a reflection of investor confidence of the future. Mostly, though, you can credit corporate behavior in the face of adverse conditions. The latest round of quarterly earnings in the U.S. (reflecting the quarter from April to June ‘09) was a series of surprises to the upside. Profits recovered not because of revenue growth but because of cost reductions.

The housing data released in the month of July reflects a clear turning point in the market. Almost five months ago, I asserted that a bottom in the housing market would be evident by this summer. Sales figures in particular had gotten so low, that they just could not continue to fall further.

The data released in the month of July was almost universally positive. New homes sales jumped 11%, inventories have continued on a downward trend, mortgage rates have remained at low levels, and existing home sales climbed for the third straight month. Even house prices as measured by the Case-Shiller Index showed the first month increase since their peak in 2006. I say ‘almost’ universally positive because foreclosures remain at elevated levels.