A Step In The Right Direction

"Hell there are no rules here - we're trying to accomplish something." - Thomas A. Edison

Today the euro zone came out with some good news.  The plan is to shore up the financial conditions by increasing the euro zone bailout fund to $1.4 trillion, recapitalize the banks and increase Greece's haircut to 50 percent.  While the details are far from being complete this is a great step towards curing the ills of Europe and the markets in Europe have responded with rallies of more than 4 percent.

In the United States third quarter gross domestic product (GDP) increased 2.5 percent.  This is the largest increase since the third quarter of last year.  All of this news has the stock market up more than 3 percent for the day.  Further good news is that all sectors contributed to the GDP growth; personal consumption rose, residential construction was up and exports increased.  All in all good news all around.

So is the end of the poor economy in sight?  Certainly if things keep improving this fast then you would have to say we are at the beginning of the about turn.  The issue is that there is still a long way to go before we can actually say with confidence that the trend is favorable.  Housing is still a major drag on the global recovery, unemployment is still far too high and the euro zone still has a long way to go to vote these measures in to effect, but it is a step in the right direction.

A further caution is that if this bailout package appears to be too small (and there is more than a small chance that it is) then this relief rally will turn nasty in a hurry.  If it turns out that sufficient funds have been allocated then the rally should continue but we will only know that in the months ahead.  As such, if you are a gambler you can take a pick at a direction, but many a portfolio has been undone with an incorrect guess.

I suggest that you stick to your knitting and wait for there to be more concrete signs that things have stabilized before going all in as after all this patience, to jump the gun too early would undermine all of our work to date.