The International Monetary Fund (IMF) officially announced this morning that the Global recession is over and a recovery has begun.  They quickly added “but leaves in its wake “deep scars” whose impact will last “many years.”

Nonetheless, the mere fact that we can move on from here is good news.

Here is the full story.

MarketWatch article: Recession Over. Recovery begins.

After worrying for months that confidence would never return, we now are concerned that we are dealing with an overabundance. For the last few weeks, experts and authorities have been doing their best to dampen optimism, and step on a few of the celebrated “green shoots” that have dominated the discussion on Wall Street since March.  There was Mark Carney, governor of the Bank of Canada, last week warning that this recovery is still weak and fragile and the World Bank announced yesterday a weaker economic forecast predicting the economy will shrink by 2.9% this year, compared to its original 1.7%.  This news sent the TSX 453 points lower into the biggest day drop since December 2008.

Before last week, for us in the investment community, none of the scepticism mattered much as long as momentum remained in our favour. Consumer confidence is up.  Stocks have rallied for four months. Long-term bond prices have begun to fall. Commodity prices have substantially recovered . And all of this happened despite the fact that economic activity is still weak.

Rising confidence is essential for the economy to recover, however, too much optimism too soon may be the biggest threat to a sustainable rebound. That is largely what worries the authorities.  The higher the market climbs, the more extended stock valuations become and the more difficult it gets for central banks to hold down interest rates.  A few days of drops like we have seen in the past few days and there goes the investor confidence again.  Stepping too hard on the green shoots however, can also backfire and kill what was coming to life.  That is what infuriates me the most because not all news is bad.  Quite the contrary.

The story is different here in Canada.  The Wall Street Journal suggested last week that Americans should think about investing in Canadian assets to take advantage of the recent interim weakness in the Loonie, as Canada’s economic outlook hinges on China and emerging markets’ demand for oil and commodities. The WSJ reported last week that while the loonie might bounce around in the next few weeks, the expected long-term trend is for Canadian vigour.

Benjamin Tal, economist at CIBC World Markets, likens Canada’s exposure to the U.S.’s woes as like a second-hand smoker. Bad but not a direct hit.  China is scooping up oil and metals that Canada produces, China is taking a bigger role in Canada’s fortunes.

Though emerging markets remain far below the lofty highs they attained more than a year ago, investors are again viewing their chances of growth as better than those of the United States or Europe.  As a result, India, China, Brazil and other emerging markets’ rally have been much stronger than the US and Europe.

“There was a stampede for the exits in the fourth quarter,” said Gonzalo S. Pangaro, portfolio manager of the T.Rowe Price Emerging Markets Stock Fund. “The market is starting to realize that although these markets face issues, they are manageable issues.”

It is not just China that is generating optimism. While industrial production has rebounded in China, so have car sales in India and retail sales in Brazil.

The fact of the matter we are no longer totally dependent on the US for growth.  In fact, Emerging Markets will play a big part in this recovery and future growth.

For the time being, by no means, is this recession over but please, let the green shoots live.

Last week we were worried about rampant inflation with too much government stimulus and this week we are worried that a correction may be underway as a result of not enough government stimulus; this after several weeks of amazing gains.  One thing is for sure, no matter what happens, we are going to be worried about something. 

The recession is far from over.  We are going to get more bad news which will continue to send jitters to the markets around the world.  If any correction is underway, it is normal after such a sharp and fast run up.  If you remember, no one anticipated the markets to start turning around before fall 2009 or even 2010.  This was a very fast run up after the deepest drop in a decade.  I think it is likely that we will see a very volatile summer and some drops before the recovery continues.  The markets never go up in a straight line , but again no one knows for sure.  Thus the importance to remain calm and focused.  Warren Buffet says that the number one reason for his investing success is his emotional stability.

In any event, the biggest threat, the one we must plan for, is inflation.  That is much more of a threat than a few more months of volatility.

As the governments around the world, especially the US, continue to pump money into the economy, some inflation is inevitable. Most economists don’t expect inflation to arrive anytime soon. But nobody really knows when it will appear or how bad its effects will be. In the meantime, we are suggesting that investors make sure that their portfolios are well positioned to w eather the impact of inflation to come.

We don’t see inflation as a problem this year and even perhaps for 2010, and some deflation is more probable in the short term. But inflation is a factor that we need to plan on. That doesn’t mean making radical changes to your investment portfolio. It means incorporating some classic inflation hedges—like commodities, real estate and making sure your fixed-income investments have relatively short maturities.

We recommend shorter-term fixed-income investments, because bonds with long maturities are most affected by rising interest rates.  Bonds can be a disaster in inflationary times.  People think that bonds are safe and can’t suffer a loss. This is wrong.  When interest rates rise, bond market value drops.  The longer the bond term, the bigger the drop. It can be quite shocking to see your “safe” investment drop in value.

It is also time to add commodities to your portfolio.  Commodity investments tend to perform well when there’s inflation because rising prices usually mean a stronger economy. That leads to increasing demand for raw materials to meet rising production and consumer needs. Don’t be tempted to make individual bets on oil or gold. Instead, buy a diversified basket of commodities.

We suggest 5 to 10 percent of a portfolio in commodities. Given commodities’ volatility, investors need to rebalance their portfolio periodically to make sure their position doesn’t balloon.

Real estate can also be a good way to hedge against inflation. Real estate investment trusts, which invest and own commercial and residential properties, are an easy and liquid way to gain access. Not surprisingly, REITs, which are required to distribute most of their income (generally from rent rolls) to shareholders, have been battered in the downturn. But they have shown signs of hitting bottom, and might be a good time to start building a position.

If you did not see us recently for a review, you will be receiving a portfolio review in the mail.  We want to ensure that your portfolio is well positioned for the recovery and inflation down the road.