Did We Hit The Bottom?

Dow's up 500 plus above the 9,000 mark here at noon. One-month and three-month LIBOR rates have fallen for the first time in two weeks. So have we hit bottom? Is it Dow 10,000 and beyond to business as usual?

Don't count on it.

While most of the economic and financial damage is already done and the global economy will not be able to avoid a painful recession, financial and banking crisis (i.e. the V-shaped short and shallow 6-month recession is now out of the window and we will experience a severe and more protracted 18 to 24 months U-shaped recession) the rapid and consistent implementation of these and other actions will prevent the US, European and global economies from experiencing a systemic financial meltdown and entering in a more severe L-shaped decade long stagnation like the one experienced by Japan after the bursting of its real estate and equity bubble.

Are we close to the bottom of this financial crisis? Today stock markets – and other financial markets - will rally on the news that terrified policy makers peering into the abyss got religion and started to do in a consistent way what is necessary but financial markets will remain volatile with significant downside risks over the next few weeks as:

- details of these plans are still very fuzzy and ambiguous and with uncertain effects on various assets classes (common shares, preferred shares, unsecured debt of financial institutions, etc.);

- macro news will surprise on the downside as the economies sharply weaken and contract while fiscal policy stimulus is lagging;

- earnings news for financial and non financial firms will surprise on the downside;

- the damage done to confidence and to levered investment is already severe and the process of deleveraging of the shadow financial system will continue;

- major sources of future stress in the financial system remain; these include the risk of a CDS market blowout, the collapse of hundreds of hedge funds, the rising troubles of many insurance companies, the risk that other systemically important financial institutions are insolvent and in need of expensive rescue programs, the risk that some significant emerging market economies and some advanced ones too (Iceland) will experience a severe financial crisis, the ongoing process of deleveraging in illiquid financial markets that will continue the vicious circle of falling asset prices, margin calls, further deleveraging and further sales in illiquid markets that continues the cascading fall in asset prices, further downside risks to housing and to home prices.

It's quite possible that we've dodged the bullet to the brain, but there's still gunshot wounds to be treated, and any of the above problems could still trigger another round of panic, and if the specifics of the plans announced this weekend aren't solid and if they aren't implemented quickly, we still could very likely face another meltdown scenario.

Look what the world had to do -- another Bretton Woods style global financial agreement -- just to give us a shot at getting out of this mess.

There are still plenty of systemic-level landmines we could stumble into over the next few months. The immediate threat of a credit crisis driving us into a Depression is over. But the situation that created the crisis is still a long way away from being solved.

If anything else goes wrong, we're right back in the soup.