No need to get your eyes checked. AIG just reported a huge profit.

In a sight many of us never thought we’d see, the bailed-out insurer AIG (AIG) returned to the black Thursday, posting an $11 billion profit for the fourth quarter of 2010 and $10 billion in earnings for the full year.

Gotta start somewhere

It was just two years ago – how time flies! – that AIG posted a $100 billion loss. The 2008 loss, of course, came just a few months after the government wrote the first in a long series of checks that kept AIG from imploding in a heap of derivatives-fueled losses.

But those days are long gone. AIG said it made $16.60 a share for the fourth quarter, reversing the year-ago loss of, um, $65.51 a share. What a company.

AIG shares rose 59 cents each in after-hours trading to $41.

The New York-based company had help in its long-awaited return to profitability, of course. The latest quarter included $13.5 billion of gains on the businesses AIG sold to raise cash and pay down some of those bailout debts. The government dangled as much as $182 billion in aid to the company, but taxpayer exposure is now down in the $50 billion range, mostly in shares held by Treasury.

On an operating basis – excluding the proceeds of those sales, a loss the company took to strengthen its reserves and gains and losses on AIG’s investment portfolios, as well as other cats and dogs – AIG lost $2.2 billion in the latest quarter. Well, you can’ t have everything.

Even so, the company was eager to trumpet its latest success. Having the government own 92% of your stock makes it all the more imperative to celebrate every step forward, it seems.

“We completed several key restructuring milestones in the quarter and we remain focused on long-term growth and building value at our ongoing insurance operations and other businesses,” said CEO Robert Benmosche. “We remain extremely grateful to the taxpayers and have made significant progress since January 2010 towards independence from this support.”

The taxpayers will surely feel the same way once Treasury is able to sell off its AIG shares at a profit, something officials have been saying they would like to start doing this year. Benmosche may well address the timing of those sales on a conference call scheduled for tomorrow morning.

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Think this week’s stock market rout is overdone? Then it’s time to load up on fertilizer, uranium and casinos.

So says Vadim Zlotnikov, a strategist at BernsteinResearch who has been comparing stock performance with changes in the market volatility index, known as the VIX. The VIX has surged this week, posting a jump (see chart, right) as big as any since the collapse of Lehman Brothers.

The new normal?

Big increases in the VIX, also known as the fear index, tend to weigh especially heavily on companies whose earnings prospects are tied closely to economic growth. These so-called procyclical stocks won’t look like a good bet if the unrest in Libya intensifies and the New York price of oil soars to, say, $120 a barrel.

But Zlotnikov says he doesn’t expect that to happen – which should be good news for the global economy and companies whose profits are strongly tied to global growth.

“While potential for spread of unrest to other major oil producing countries is clearly possible, this is not our base case as governments of oil-producing countries will seek to mitigate unrest through wage and other concessions,” he writes. “Under the scenario of sustainable $100 oil during 2011, the adverse economic impact should be contained and a ‘normal’ decline in VIX should ensue during the next couple of weeks.”

Should that happen, shares of companies in procyclical industries such as agriculture and heavy industry should get a bounce, Zlotnikov says. He points to fertilizer giant Mosaic (MOS), casino operator Las Vegas Sands (LVS), trust bank State Street (STT), engine maker Cummins (CMI), aluminum smelter Alcoa (AA) and uranium miner Cameco (CCJ) as good bets for the normalcy trade.

And what if Mideast unrest is here to stay and the global growth engine does run out of gas? No surprise, he points to defensive stocks – starting with oil majors Chevron (CVX) and Conoco (COP), drugmaker Bristol Myers (BMY), electronics maker Sony (SNE) and satellite TV company DirecTV (DTV).

One way or another, we should have a decent idea in the coming weeks as to how fearful this episode may be.

“History suggests that major daily spikes in VIX are generally not sustained,” Zlotnikov writes, “with 60% of the gains eroding after 4 days and almost 75% disappearing after a month.”

So relish those stock mispricings –  if not the fearful feelings themselves — while they last.

Also on Fortune.com:

• Here comes $4 gasoline
• Can the Saudis really ride to the rescue?
• Geithner fails rocket science quiz

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Tim Geithner has raised the time-honored Washington tradition of kidding yourself to a whole new level.

You may worry about the implications of $4 gasoline on an economy that hasn’t exactly been going gangbusters as it is. It’s no stretch to say the recent surge in commodity prices could ground an anemic recovery in consumer spending.

Rocket’s red glare

But Geithner fairly throws back his head and laughs in the face of this scourge. Why? Because unlike so many others, he has faith in the Fed.

“Central banks have had a lot of experience in managing those things,” the Treasury secretary said of commodity price spikes at a Washington event Wednesday. “It’s not rocket science.”

It’s not, but that’s beside the point. Smart as it is, there is almost nothing the Fed can do to clean up the oil mess, even if it were inclined to act – which it almost certainly is not.

That means the inflationary headwinds against the weak U.S. recovery aren’t about to let up.

This week’s oil price spike, which took the cost of a barrel above $100 in New York and to $120 or so in London, is being driven less by strong global demand and more by a squeeze on the flow of oil from the Middle East.

Ben Bernanke is surely a resourceful guy. But there is not much a central banker can do to restore the flow of oil from Libya or boost output in Saudi Arabia.

Of course, there is a case to be made that the Fed could trim underlying demand for oil and other goods by tightening policy. Strong demand is a large part of what took oil to the $80 or $90 or so a barrel that it had fetched for much of the past year till the Mideast unrest.

But the Fed could do so only by prompting an economic slowdown – which is exactly the outcome Ben Bernanke & Co. are trying to avoid with unemployment still at 9%.

And as Geithner of all people should know, just because the subject matter is easy doesn’t mean the Fed is apt to ace the test. His former employer has proved that over and over during the past decade.

Most glaringly, the Fed botched simple interest rate math in 2003 and 2004, keeping rates so low for so long that it managed to inflate a massive credit bubble that popped a few years later with devastating consequences.

Lifting off

The Fed also booted the seemingly simple question of “Should you lift a finger to prevent massive mortgage fraud,” with Alan Greenspan cleverly filling in the box next to “No, the market is already doing that, thanks very much.”

So the Fed’s report card isn’t exactly pristine to begin with. And the test the central bank faces now is a lot tougher than the ones Greenspan & Co. bombed seven or eight years ago.

In short, Bernanke & Co. can keep doing what they are doing and hope the momentum in commodity prices peters out. Or they can pull back from asset purchases and risk pulling the rug out from under the domestic recovery. Guess which one they’re going to pick.

Just in case Bernanke hasn’t been clear enough in his dedication to holding down rates, a 2004  speech makes it clear that the Fed chief believes there is no rush to tighten monetary policy just because commodity prices are going nuts.

If inflation has recently been on the low side of the desirable range, and the available evidence suggests that inflation expectations are likewise low and firmly anchored, then less urgency is required in responding to the inflation threat posed by higher oil prices.

So no, this isn’t rocket science. But saying it doesn’t make getting the economy off the launching pad any easier.

Also on Fortune.com:

• Here comes $4 gasoline
• Can the Saudis really ride to the rescue?
• Why the inflation hawks are still grounded

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