From Wall Street to Main Street...

The current economic crisis which began with the sharp rise in subprime delinquencies earlier last year seems to have remained within the confines of Wall Street. The latest data suggest that main street was and remains relatively unscathed by the turmoil. Corporate earnings for the first quarter has been a mixed bag of surprisingly good and very disappointing results, inflation seems to be relatively tamed, unemployment is not exploding and preliminary first quarter GDP would have you believe that the economy did not contract yet.
Vital signs for the markets are also turning back to normal as observed with the sharp decline in volatility, a sharp rise in treasury yields, the stock market rally and what seems to be a recovering dollar. Even the Fed has alluded to a pause after the most recent 25bp cut in order to assess the impact of its actions.
With all the positivity out there one may wonder if the economic turmoil has reached bottom. I for one remain skeptical that the rebound can be maintained because fundamental issues such as housing deflation, strained lending and record commodity prices continue to plague the markets. The housing deflation and credit markets pose a significant threat to the well being of main street and therefore need to be addressed rapidly and effectively. Cutting the target rate is not going to stop home prices from dropping but we cannot deny that the additional actions taken by the Fed have had a soothing effect on credit markets although the TED spread (3Month Libor - 3 Month Treasury) at 1.37 is still considerably above the 0.20 to 0.35 levels of the period preceding the crisis. As for commodities, the persistently higher prices suggest that the underlying mechanism has changed meaning that we can no longer rely on a simple economic downturn to bring prices back to more normal levels.
Bottom line is that many outstanding issues continue to pose a threat to the recovery (if that is indeed what it is) before we can give the economy the all clear.