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April 03, 2009. Inching away from the edge.

As Obama Sets a New Tone for Alliance With Europe, the tone in the US remains decidedly dire, with the NY Times reporting No End in Sight to Job Losses; 663,000 More Cut in March.

There is a dichotomy at work here and it’s painful to watch. Recovering economy or pending depression? Staggering bear market or Memories of bull? Buy or sell?

While on the one hand, deep cuts and fissures are appearing everywhere, some news outlets are actually reporting good news (sic).

Today, Reuters reported that the Emerging Recovery may Give Legs to Market Rally, which is a no-brainer reflection of what we’ve been seeing in the marketplace: substantial recoveries around the world peppered with precarious backsliding.

In the Reuters article, Natsuko Waki and Jeremy Gaunt deliver some positive signs: such as the US housing market beginning to stabilize, with February housing starts rising for the first time in 10 months.

The convertible bond market (which allows bonds to be converted to stock, sometimes with price share price triggers), too, is seeing big gains. “…Some $3.2 billion (2.16 billion pounds) convertible bonds were brought to the market in the first quarter,” they say.

Housing starts rising? Investors are buying convertible bonds en masse? What’s next? Iceland buying back banks with barabonds?

Whatever the case, rising investor despondency has given way to some measure of confidence. In March, world equities made their best monthly gains since December 1999. For this we can thank a fairly concerted global effort by the G20 to pump money pulled from thin air into the IMF and countless infrastructure projects around the world. (I’ve applied for $25 million loan to fix a leaking faucet in my bathroom. Haven’t heard back yet.)

In fact, the Group of 20 countries, have pledged $1 trillion dollars in the near term. The Toronto Star reports, “[UK Prime Minister Gordon] Brown said the G20 nations are “now implementing the largest macroeconomic stimulus the world has ever seen. Including earlier commitments, the G20 will inject a total of $5 trillion into the global economy by the end of 2010,” he said.”

Something in this reminds me of this month’s Vanity Fair article entitled “Wall Street on the Tundra” by Michael Lewis. In it a hedge fund manager tidily explains the rise and fall of Icelandic banking: “You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets.”

Isn’t there a lot of this going on right now in the form of buying or “saving” toxic assets? Here in Canada, our own Jim Flaherty believes that the Pace of bank remedies is too slow, according to Report on Business. Flaherty said he fears the banking needs more urgent attention, lest the entire global economic picture become mired, immovable. To wit, Flaherty is called for governments to clear their banks of toxic assets.

Considering that Canada’s banking system has been touted just about everywhere as conservative, clean and above all more correct than other western nations in its approach to modern banking, Flaherty feels (and maybe rightly so) that he can lead the siren call to a new global smartening up. Yes… careful is the new whimsy.

It’s a bit of a scary proposition no matter how you look at it, because if the economy doesn’t recover fairly quickly, there’s an increasing chance that these “toxic assets will never recover” leaving the governments that buy them holding on to mass amounts of worthless paper. Once again, like Iceland.

On the other hand, as the NY Times points out, “For a relatively small equity exposure, the private investor thus stands to make a considerable return if prices recover. The government will make a gain as well. In the worst case, the bulk of the risk would fall on the government.”

Meanwhile, banks around the world sit on an estimated US$2.2-trillion of toxic assets.

New York University professor Nouriel Roubini has stepped into the fray again on the economy arguing that the present market rebounds are “way too optimistic”. Roubini, aka Dr. Doom has a believes that government intervention has been helpful, but won’t prevent the recession from lasting into 2010.

“I expect the recession to continue all the way through the end of this year. The rate of economic contraction is going to slow down from minus 6 [per cent annually] in the first quarter to something close to minus 2 by [the fourth quarter],” he told the Globe and Mail.

So what does this mean to resource investors?

Well, if you go in for the conservative approach, you may want to follow Roubini and consider gold as an investment. Since deflationary forces will continue to be at work for the next few years, he argues, “gold represents a safe haven not against inflation but against Armageddon, in a world in which … banks can’t even be bailed out and people are going to buy guns, ammunition, gold bars and canned food and rush to their log cabins. But that’s a world of great depression. I don’t think we’re going to end up there.”

Pretty clear, isn’t it?