Professional economists have reached a near-consensus for an economic recovery to begin later this year . On May 27 the Associated Press reported that over 90% of the economists who are members of the National Association for Business Economics predicted a turnaround in either the third or fourth quarter of this year. A few thought it might be pushed out until early 2010.

This is good news for those who want to see a healthy economy, but it would be a stretch to say that the beginning of a recovery means a quick return to financial health. The problem lies in the pace of the recovery. If we were to pull out of the downturn quickly, where pre-recession levels of income and production were achieved within a few quarters, then we could begin a serious celebration.

I have been writing about the American economy on Seeking Alpha just over a year, since December of 2007. But it is only now that the full extent of my shortcomings as a writer has become clear: I have run out of adjectives that describe the terrible state of the American economy. Every month it’s the same: what’s bad got worse, and what’s good is less good than it was; next month will be the same. (See below for links to previous articles on the economy.)

Recently, however, I have noticed a few indicators that a turning point may not be too far away. A couple of words of caution: a 2009 recovery, though indicated by some measures, is still highly problematic. Worse, the recovery, whenever it comes, is going to be SLOW! Consumer spending, which fueled the bubble, will not be as robust as it was at the peak of the bubble. It will probably be restrained for several years, if not more.

The Group of 20 meeting scheduled for London on April 2nd will be an important occasion for Mr. Obama, and, indeed, the entire world. The heads of state of twenty three of the world's largest economies will be at the meeting. The agenda, which was set at an emergency meeting in Washington last November, is vitally important to the economic recovery of the world's business and trading community.

At the November meeting, 47 points were agreed upon to be included in the London session. The major points were aimed at the financial crisis that was just then being recognized as serious, but has, since then, risen in magnitude. It is now seen to be the worst downturn in modern memory, rivaling the depression that gripped the world for more than a decade in the 1930s.

Over the last five years, China has become the number one buyer of American Treasury obligations. Spending close to 15% of their GDP on American Treasuries, China passed Japan in September of last year to become the largest overseas holder of America’s sovereign debt. This was not by chance. The Bush Administration had earlier made a deal with China. We would allow Chinese hard products unfettered access to American markets, if they would buy our debt. Both countries got what they wanted: China got a huge market for the products of its new factories, and America got its huge budget deficit financed on the cheap.

The deal allowed us to continue the enormous trade deficit we ran with China without taking any corrective actions. And the Chinese continued suppressing the price of the yuan to allow for its trade surplus to continue.

Credit was at the heart of the current recession; it is also key to its recovery. The absence of a smoothly functioning credit system is life-threatening to a capital intensive economy. We saw that trust and confidence, two of the essential ingredients to a free flow of credit, were both lost in 2008, causing the economy to sputter to a halt. Consumers couldn’t get the financing they needed to buy big-ticket items; businesses couldn’t float short-term loans for production of new inventory, and long-term financing for plant and equipment expansion was simply not available.

This sorry state of affairs is quite perplexing to policy makers. It has been so long since we have experienced anything evenly remotely close to the present situation, that it is difficult to find anyone who can get a handle on it. In the United States we saw the utter bafflement in both the executive and legislative branches of government as to what to do. Ben Bernanke and Hank Paulson knew things were bad. They told the President and they told the Congress. But their first proposals turned out to be more comical than serious. Some were afraid the United States had become a Marxist state, but, if it is, it’s more like Groucho’s than Karl’s.

As an investor and an economist, I am glad to see this year consigned to history. The economy is in as sorry a state as I can remember. It will hold the unenviable record of being the first full year of recession since the Great Depression of 1929. It is also the year in which a financial crisis holds the entire world in its grip. Equities markets have crashed in nearly every country, and bank after bank has lined up with their begging bowls at their governments’ hand-out window.

The outlook for 2009 is also grim. Much of our economy has collapsed like a house of cards. Credit cards, second mortgages, housing prices and complex financial derivatives were stacked on top of each other. They haven’t stopped falling yet, and it looks as if it’s going to be some time before they do. Until then, there can be no talk of recovery.

The Russian ruble has dropped about 2.5% a month since August, despite being heavily supported by the Bank of Russia. The cause is, of course, the fall in oil prices. About three quarters of Russia’s exports are related to oil, and the revenue generated by oil sales funds much of the government’s budget. They need oil at about $70 a barrel to pay their bills.

The chart below shows a long-run perspective on the ruble:

All of the leaders who came to Washington to save the world’s economies have gone. The meeting room is closed, press releases have been handed out, and the leaders are turning their attentions elsewhere until the next meeting in April, probably in London. In the meantime, the agreed upon agenda will be fleshed out and put forward at the London meeting.

What did they accomplish in the one-day meeting? In terms of concrete, measurable achievements, the answer is simple: they agreed on an agenda for the next meeting. As to whether this agenda is good or bad it will depend on your view of the goals. From the reading I have done of newspaper and blogging sites, opinions varied from exuberance to disgust.

The emergency meeting of the Group of 20 this Saturday, November 15, was called because the world’s financial system is broken. The crisis is shredding financial markets around the globe:

• It is driving currency markets into turmoil: currency devaluations are threatening all currency markets. Note the table below on the effects on the currencies of both developed and emerging markets:

• Capital markets are plunging into record declines. Just when they need foreign reserves to defend their currencies, Russia and Brazil, just to name two, are seeing massive outflows of capital.  The graph below shows the stock markets for Brazil (EWZ), Mexico (EWM), Turkey (TUR) and Russia (TRF) over the last three months:

Investors in currencies are confronted with some uncomfortable realities.  Currency prices do not respond to the same events that drive equity and bond prices, so the investor must look for different signals.  World demand for a specific currency is influenced by an uncountable number of factors, and no academic study has ever pinpointed a single variable that is a reliable predictor of future currency prices.  The most important single variable is the interest rate spread between two currencies, but even so, interest rate discrepancies fail to accurately predict future currency prices.  There are too many factors that influence currency prices for one single thing to have a consistent effect. 

Also, currency investing, as opposed to currency trading, has almost no accepted wisdom to guide an investor.  For normal securities investing, there is a body of standardized advice to which many professionals in the industry subscribe. The majority of financial advisors, for example, will probably give an approving nod to a diversified portfolio of large and small cap stocks, mixed with international equities and short bond funds.  But, there is no similar agreement in currency investing 

Bonds and bond funds of short duration come to the fore during times of economic crisis. They are the ultimate destination of a flight to quality, especially if they are Treasury obligations. The graph below shows the total returns over the last three months of a few short bond ETFs as compared with the S&P 500. I use total returns here in order to show the effects of dividends which each of the three bond ETFs pay on a monthly basis.

The three bond ETFs shown are: SSgA’s SPDR Lehman 1-3 Month T-Bills (BIL),  iShares 1-3 Year Treasury Fund (SHY),  andWisdomTree’s Current Income Fund (USY). The WisdomTree offering is the only one that is not exclusively Treasury obligations. As a matter of fact,  the average duration of this ETF is the lowest I have ever observed—even lower than money market accounts.

Nothing could make me happier than to put the financial crisis behind us. The legislation passed Friday by our elected representatives was a relief. As a nation, we had, in my view, reached a point where we needed to see that our elected leaders could come together and act in unison. In this case, appearance of action was probably as important as the action itself. 

As far as we've come, though, we have further to go; the crisis is not behind us.   At this early stage of discovering the nature of the problem, the consequences of the rescue plan are not well understood. We don't know how well the plan will work. My best hope is that it may be the beginning of the end of the crisis.

There has been much speculation about whether Barclays Capital (BCS) would walk away from the ETNs that Lehman Brothers (LEHMQ.PK) sponsored. Recall that Barclays bought Lehman Brothers North American investment banking and capital markets businesses on September 16, just prior to Lehman’s bankruptcy filing. I could hear the gnashing of teeth and moral outrage directed towards Barclays all the way to my quiet little corner of the world here on the north coast of California. It was as if it was Barclays’ ethical responsibility to rescue these ETNs from the jaws of bankruptcy, thereby protecting the reputation of ETNs in general.

In a conversation yesterday with someone who is familiar with the merging process of Lehman and Barclays, but who would speak only off the record, I received a definitive answer to the question: No! Barclays will not pick up the assets of Lehman’s ETNs. The ETNs will not be assumed because they were not part of the entity purchased by Barclays.

A mistake is often a good place to start a quest. My recent article on WisdomTree's new currency ETF (CEW) (WisdomTree's New Bundle of Joy) contained the assertion that it was, to my knowledge, the first actively traded currency ETF. Soon after the article appeared, another Seeking Alpha frequent contributor, Tom Lydon, mentioned in a follow-up note that the SEC had classified all of WisdomTree's currency ETFs as actively managed. 

His statement was correct, yet I didn't consider their single currency ETFs as actively managed simply because the SEC must classify every ETF registered under the Investment Company Act of 1940 as either indexed or active. Since no single currency fund can be indexed, therefore, by definition, it must be active. At least that was my reasoning that led me to see CEW as the first actively managed fund. It is slated to come to market late this month with ten currencies in its portfolio, and the countries that are in the portfolio can be varied, according to the manager's discretion.

There are two areas of bond investing that have seen large inflows this year: international bonds and domestic high yield, otherwise known as junk.

The table below displays the results for the international ETFs available in 2008:

Currency investors got a present today. WisdomTree announced a new currency bundle,  coming near the end of September. According to their website, the new ETF will carry the symbol CEW under the title The Emerging Currency Fund (CEW). To my knowledge, it will be the first actively managed currency fund on the market.  It will include the following currencies:

• Mexican Peso             
• Polish Zloty
• Brazilian Real             
• Hungarian Forint
• Chilean Peso              
• Turkish Lira
• S. African Rand         
• Chinese Yuan 
• Indian Rupee             
• S. Korean Won

The kicker in this selection, though, is that any of these currencies may be removed and /or replaced with others,  if the fund manager sees it as necessary. This is active management, and it can be good or bad, depending on how lucky manager is, if you believe indexing is the best approach, or how good, if you believe in active management. There are ten currencies in the fund now, but they may elect to go with as few as eight or as many as twelve—depending, again, on the manager.

I have been following developments in currency exchange traded products for a few years. It is a new field,  (Rydex introduced the first currency ETF in December, 2005), so it lacks a long history of action/reaction that helps analysts put it all together. And I confess that I haven’t put it all together yet. One of the things that puzzles me is the role Barclays Capital is playing and will play as the market matures. They dominate the equities and bond ETF business,  yet they are in fourth place in the currency world, behind Rydex , PowerShares, and Wisdom Tree—all relative newcomers to the exchange traded market.

It’s understandable that no firm can be dominant in all fields. Specialists are going to win some of the niche battles, and make no mistake,  currency investing, with just over $5 billion in assets, is a niche. But I am still puzzled by their performance against the relative lightweights that now dominate currency products. 

The announcement came with a press release from the Bear Stearns (BSC) website that tracked their stillborn baby, the Bear Stearns Active ETF Trust—their Current Yield Fund (YYY). Announced on March 10, 2008; it ceases operation on October 1, less than six months spent in suspended animation.

click to enlarge