Montreal, Canada

Thus far into the corporate earnings season, the results have best unimpressive. And U.S. Treasuries have noticed, as the benchmark yield on ten-year paper declines from 3.84% on December 31 to 3.70% this morning.

Outside of the technology sector, which is leading a capital spending recovery this year, companies aren't exactly hitting the ball out of the park with strong numbers.

For the most part, revenues are flat to slightly higher while net income has indeed increased – but compared to 12 months ago that comparison is pretty easy. Combined with fudged accounting rules in the United States since May and creative accounting elsewhere, it's no wonder banks have recovered sharply. Plus, let's not forget the Fed's greatest gift of all – providing a remarkably profitable spread trade where banks received near-zero percent money and thereafter reinvest in longer dated paper or make loans at a sharply higher rate of return.

With the exception of China, India and several other advanced emerging markets like Chile and Brazil, the global economy is not booming any time soon. The West remains stuck in a debt-infested rut and the markets have begun to protest the mountains of money created since late 2008 to arrest falling prices; government bond yields are now rising over the last six weeks as the risk of a sovereign default grows. Dubai, Iceland and Greece are just the tip of the iceberg or the hors d'oeuvre before the main course.

For the most part consumption has recovered from the depth of depression in Q4 2008 largely on the heels of massive government spending in the West and of course, in China. I imagine as the year progresses, this sugar rush, which is propping a sick global economy desperately trying to reinflate asset values, will exhaust itself. It also implies that sometime over the second half of this year, maybe earlier, global markets will suffer one Mother of a correction. Stocks have barely declined 8% from their post-March highs and are overdue for a pullback.

In the United States, still nursing deep wounds inflicted by the credit crash, consumption is still largely impaired. Consumers have boosted spending compared to 12 months ago and that's normally a good sign. However, the big gains in retail are coming from the likes of discount stores, not high-end retailing or even Wal-Mart Stores. Consumers are frugal. I suppose the "feel good" factor is long gone and won't make a comeback until real estate recovers combined with jobs growth.

Other important indicators such as employment and credit growth remain deeply in negative territory year-over-year. Also, credit intermediation, apart from Washington's assistance to homeowners and small businesses, has not recovered from its 2007 peak and probably won't any time soon. Beyond April, there won't be a tax credit for new homeowners.

Finally, it's noteworthy to point out again that following big declines in U.S. economic output over the past 100 years, the economy has always recovered sharply. Actually, a boom is more accurate.

The bigger the drop in GDP, the bigger the bounce. Indeed, as outlined here recently, courtesy of Grant's Interest Rate Observer, the U.S. economy went through the roof starting in 1934 following a massive 27% crash in output from 1929 to 1933. The same story, though not as sexy, occurred in prior booms and busts.

If the above historical association is true then what can we expect in 2010? Will the United States post a significant economic recovery?

Increasingly, even amid a wall of government stimulus spending, the economy is not bouncing back vigorously. You have to wonder what lies ahead once Washington starts pulling back on spending or if the Fed is forced by the markets to start raising interest rates. There's not much juice left here unless business spending really takes off. It better, because consumers won't.