The basis for sustained recovery in market sentiment arrives when investors feel confi- dent that the worst has been fully account- ed-for. However, as yet, there is scant evi- dence that this moment is at hand. Firstly, economic forecasts remain subject to ongo- ing review as negative trickle-down effects permeate through the global economy; and secondly, it is clear that investors have lim- ited faith in official endeavors at stoking recovery. This is evident from the fact that equity markets are broadly unchanged from late-October despite the implementation of fiscal and monetary stimulus measures of unprecedented proportions. In a world rid- dled with debt, the fact is that the efficacy of traditional economic policy measures has been seriously compromised.

Worse, despite official reassurances, it is also clear that talk of deflation is growing daily. The Japanese experiences with deflation may be regarded as an extreme case whose reoccurrence elsewhere lies firmly in the tail-ends of the probability distribution curve; but the recent sub-prime debacle in the US (and elsewhere) is a scenario not too far removed from the profligacy of the Keiretsu system in Japan in the 199Os. Moreover, Japan's land/asset price bubble and it subsequent collapse was certainly 'extreme,' but in 2008, the boom and bust is replaced by one that it is both internationally diverse and synchronous.

In addition, the lack of a "wait and see" option means that central banks and treasuries must act in a pre-emptive way - just as the US Federal Reserve has done in quietly adopting a policy of "quantita- tive easing"; but the very act of embracing radical measures - / both at the Fed and at other major central banks - reinforces the notion that the risks are greater than are being acknowledged. If this were not enough, then there is also some talk that if the Japanese experience of the 1990s is a realistic prospect for many major economies in 2009, then "quantitative easing" itself may not be radical enough. Specifically, with fiscal deficits soaring in bank-bailout countries, longer-term bond yield may remain at relatively elevated levels, which was widely seen as a principal restraint on the Japanese economy after its own bank recapitalization in 1998. Central bank purchases of government debt would therefore be near the top of their 'to do' list if deflation-risks were seen to warrant more aggressive action.

Whether or not deflation talk is genuinely evolving from justifiable incredulity to plausible contemplation is open to debate, but an ample source of negative newsflow may be serving to suspend the market's disbelief; and whilst uncertainty persists over the severity of the global economy's downturn and the ability of officialdom to come to its rescue, it is hard to imagine the requisite majority of investors remaining impervious to the ongoing flood of depressing economic news. That being the case, then risk aversion in the market place seems likely to be with us for a little while longer.

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