The loans are now being called in, creating a cash squeeze. Strange that this should cause a panic: everyone knew that there were few lights burning at night in those luxury flats, which had been bought by speculators and not by would-be residents. Airport car-parks were full of gleaming SUVs whose owners could no longer afford the leasing payments and had absconded, leaving the keys in the ignition. Sheikh Marktum now has to appeal to his brothers from the emirates in Canossa for a bridge loan. But not everything will be saved: the Palm Islands will likely end up parched. In the coming months we will be seeing more headlines about these oversized, recession-clobbered, money-losing ventures. Meanwhile there is also fresh talk about Greece's staggering national debt, about the sad state public finances in Ireland and Spain (two recipients of lavish EU transfer payments), about the rout of the Baltic region and about the developed countries' bloated budget deficits.

With global money supply now 30% bigger than before the credit crunch, people are fleeing fiat currencies. Commodities are forming a new bubble: investors will pour over $200 billion into commodity indices this year, compared with $15 billion in 2003. Oil stockpiled in tanks to take advantage of a market in contango is brushing $80 a barrel, even though fundamentals would argue for a price half that much. Sugar, soybeans, cocoa and metals are likewise in a steep climb. Star anise, being snapped up by Chinese to ward off swine flu, has risen tenfold. Americans for the same reason have bid up contracts on orange juice concentrate by 50%. Why blame Chinese, Indians and Asians in general for shying away from currencies that are losing their substance and that look increasingly risky? As we quoted from Gounod's Faust two months ago, "the Golden Calf reigns above all (...) and 'tis Satan who leads this dance." Nothing has changed. Gold has just breached the $1200 level effortlessly against a weakening dollar. Only a fall in US equities could make gold beat a retreat.

To bring back confidence, governments should have separated banks' commercial and investment banking divisions as the Glass Steagall Act had done. The public would not have queued up to withdraw their savings after hearing about the colossal losses racked up in the investment banks' trading rooms. The big central banks have been using near-zero interest rates to kick-start an economic recovery, but the effectiveness of the gambit remains to be proved. (Witness Japan.) For the moment commercial banks are taking advantage of this gift of free money to buy risk-free bonds. That may be typical, but the scary thing is central banks buying up long-term debt hand over fist to drive down yields and to refinance their short-term borrowing at zero interest rates.

The central banks are living dangerously and could cause an upheaval on bond markets that would make 1994 seem like a shiver in comparison. Confidence has been restored much more quickly in the minds of investors than it has in the real economy. Once incentives to buy new cars have disappeared, the auto industry may find itself slamming on the brakes. Consumer credit is collapsing (an unusual and disquieting phenomenon). Savings rates are rising. Unemployment is painfully high. While Wall Street prepares to rake in its ill-gotten $30 billion in bonuses, Main Street despairs at silent cash registers and lays off staff. The only sector of the US economy where a recovery can be seen is real estate, where the Case Schiller index has turned up in recent months. The American economy will be the first to come charging back, as usual, after trimming its production facilities and workforce to the bone during the recession. It will be a while before Europe, where governments have delayed reforms, to return to an acceptable rate of growth. Germany will be the country with the most energy to burn, given its sounder state finances, unlike France whose president's promises to redistribute the tax burden are not at all on track. The plan to borrow on top of borrowing smacks of public relations and truly French-style economic willpower. Fresh debt is making investors wince, because the country's already perilous financial situation makes investors wince. What if the business cycle does not take off again this time? Europe is paralysed by political inaction and will lag the rest of the world when the recovery moves into high gear.

We will not balk at making forecasts for 2010. In our view the weakness of the present upswing will test stockmarkets sometime in the first quarter. In November individual shares fell more than benchmarks in thin trading. There is still interest in commodities, gold and the emerging markets, so we still think it would be a good idea to reduce exposure to equities and bonds alike by selling into rallies. We would also lighten up on commodities while keeping gold as insurance against all forms of risk. If shares pull back in the first quarter, the dollar should firm up.

Patrick Ségal