"The time has come," the Walrus said, "To talk of many things...
- Alice Through The Looking Glass
time which has come is that anticipated in this column on March 27,
under the heading "The Relief Rally" and relating to the rally in stock
markets round the world, which had begun earlier that month.
That column, in turn, opened by quoting an earlier one, before
updating and extending is purview: "In mid-February... this column
suggested that the equity markets were embarking on another selling
wave which would carry them to lower levels than those seen at the
climax of the previous waves, in October and November.
"It further suggested that the levels reached in the
then-imminent leg down would - unlike the series of lows made since
October 2007 - stand for rather longer and provide a starting point for
a serious and prolonged rally... [This] forecast has been largely
realized... Global equity markets did indeed record another sharp fall,
which... climaxed in the first part of March... It is no longer absurd
to speak of a rally phase in the markets which will continue through
the spring and summer, perhaps even somewhat beyond...
"Unfortunately, though, the same technical analysis
[that forecast the rally] views this rally, long and strong as it may
be, as no more than a 'bear-market rally.' That means that the major
bear market will resume at some point, whether that point is in the
summer or (aptly-named) fall. The bottom recorded in March is not
expected to be THE bottom of the major bear market that we are in.
There is worse - according to some approaches, much worse - to come...
"There is, of course, no guarantee that these predictions will
be proven correct... [but] it would seem safer to ride the rally but
make sure to exit the market during the summer, than hope that the
policy-makers have finally tamed the raging bear."
are, some 41/2 months later, with the markets having climbed at least
50 percent from their early-March lows, and by much greater margins in
the case of some markets and sectors and of many individual stocks. The
same forces powering the equity markets have been at work in the bond
markets, where corporate bonds have recovered strongly from their
debacle last year, while government bonds have lost ground, and in the
commodity and currency markets, too.
The same pattern is apparent across the board: The more
speculative the market, the stock, or the currency, the more it has
risen. Indices of small-cap stocks have outperformed those of
large-caps, and secondary currencies have done much better (against the
safe-haven currencies, i.e. the dollar and yen) than have major ones
like the euro.
That common feature is itself very revealing, because it indicates that the driving force behind this rally is simply liquidity.
And how could it be otherwise? The staggering and unprecedented
amounts of money poured into the global financial system by governments
and central banks across the globe have achieved their initial goal of
restoring liquidity and hence confidence, after these evaporated in
September 2008, triggering the greatest financial and economic collapse
in three generations.
The debate today focuses on whether these governmental efforts
have reversed the deflationary forces at work in 2008, or only
temporarily arrested them. Although powerful arguments can be made for
and against the bullish, the mildly bearish and the very bearish cases,
ultimately no one knows. The tempting thing to do is to ride the bull
and hope for the best - namely a full recovery and a new era of
prosperity. But the speed and extent of the rally to date is actually
an argument against this "close-your-eyes-and-hope-for-the-best"
The only thing everyone must leave to hope is that the
ultra-bearish analysis is wrong and that Bernanke & Co. have done
and will continue to do most things right.
But to hope that prices will continue to rise more or less
non-stop is, to say the least, foolhardy. As this column has repeatedly
argued, there is no justification to pay attention to the cheerful
analyses of the big banks - just reread their pre-crash stuff to see
why. Yet optimistic sentiment is reaching as great an extreme as it did
In these circumstances, surely the sensible and prudent thing
to do is to stand aside or, better, take cover. Avoiding another
hammering is far preferable to missing out on profits, because you can
survive the latter - but not necessarily the former.