Q. John, are we at the bottom yet (in equity markets) and what do you see for world markets in the next 12 months?

A. The US economy has substantially worsened in recent months; and the US and global economies are now in the early stages of a significant recession.

In early 2007, the problem was confined to the leveraged loan market as banks revealed their $300 billion in toxic loan commitments to US private equity deals. This was an isolated capital market problem, which had not materially impacted GDP. But in September 2008, the safety of money market funds came into question, seriously frightening individuals into taking cash from their bank accounts, putting all spending on hold and hoarding cash. Since then, GDP has been in serious decline.

Ironically, beginning in March 2008, the Federal Reserve's series of liquidity measures, designed to provide cash to troubled Wall Street institutions, made this situation worse. They sold Treasury bills simultaneously, withdrawing reserves from the banking system, resulting in less than a 1% annual rate of growth in bank reserves and the monetary base in the 12 months leading up to September 2008. Since the September crisis, both reserves and the monetary base have more than doubled, which will eventually solve the problem. But the Fed was very late to the party.