The term "green shoots", which has been adopted as a synonym for signs of recovery, is misleading in that it implies growth when really we haven't seen any growth yet. Financial markets, the soil that breeds green shoots, have improved as credit spreads have tightened, commodities have recovered, and equities have rallied. For that reason, the economic landscape is better descriped as "greater arable land" than "green shoots." We won't have green shoots until we have profits.
I wrote a few weeks ago asset prices would reinflate until we came to a reversal of the expectations cycle. The expectations cycle is the product of constant forecasting by economists and Wall Street. In early 2009 we had worse than expected economic data which pushed asset prices to their trough in early March. This worse than expected data brought about more pessimistic forecasts. The "green shoots" of the last two months have come from these overly pessimistic forecasts. I think we have now reached the next turning point in the expectations cycle.
Whether this is occuring or not will be evident in the next few weeks' economic data. For a start, it will be interesting to look at the consumption data coming out later this week. So far retail data has been more negative than expected. If this week's consumer spending data is negative it indicates the American consumer has increased its rate of deleveraging. The end of 2Q is also coming up soon. 1Q earnings were better than expected, especially for banks. Now that expectations have been revised upwards, it is very likely we will see a significant fall in stocks after earnings announcements.
Lastly, I'd like to recommend an article in today's FT by Martin Wolf. Martin Wolf has written repeatedly that "too big to fail" is a fundamental problem and needs to be corrected because once a firm gets to this point, it is no longer a true market participant as its downside is limited. One suggestion of his in the past was to have these firms pay regular fees to regulators for a "bail-out fund" or something of that sort. I think this peice is his magnum opus on moral hazard and the regulatory overhaul, and you can find it here.
