Has the sun finally risen on the global economy?

Its obvious this question must have arisen in a lot of investors minds, especially considering the way most asset class prices have rallied over the past 3-6 months. Is the sub prime crisis and its spillover effects well and truly behind us? I do not believe that's the case, atleast not yet.

To put things in perspective, its the fact that things are getting "terrible" from a "disastrous" state 9-12 months ago. Which means there still exists scope for pain ahead in global financial markets. It also needs to be remembered, the huge gush of liquidity brought in by several central banks might already be setting the stage for the next bubble. However, we could be a few years away yet from the formation of a new bubble.

The problem areas still remain strewn over different geographies and asset classes. In terms of geographies, the UK and Eastern Europe come to mind. Debt and mortgage levels remain high across both regions, Eastern Europe had been in particular focus due to problems with the Latvian economy. The US housing market still faces high inventory levels notwithstanding the recent positive numbers. Currencies also seem to indicate low confidence in the present rally, which is illustrated by the lack of upside momentum against the US Dollar.

Another important charachteristic of this rally has been this has been driven by "expectations". What happens should these expectations be disappointed? It is notable to state almost all asset classes i.e stocks, bonds, currencies, commodities have all rallied at the same time. Such rallies do tend to shake the belief of the most seasoned investors who have a defensive approach, let alone a guy like me who is still on the learning curve.

Adopting contrarian positions in such times is likely to be extremely rewarding, albeit there could be some amount of pain in the short term. Examples could be taking profit in equities and buying the US Dollar. Its almost a consensus view that the US Dollar is likely to weaken, even a slight strengthening of the US Dollar in the event of any new crisis is likely to send the cat amongst the pigeons. Though its difficult to pinpoint what the new crisis might be, a crisis of confidence in government debt (of Eastern European countries for e.g.) or even a currency crisis does not seem far fetched. Noted investor Jim Rogers believes the world is likely to see a currency crisis sometime in the near future.

So what would i be doing? Well, all a small investor like me can do is take profits on equities, wait and watch. The dawn might be here, but we are some way away from the sunrise as yet!