"The time has come," the Walrus said, "To talk of many things... - Alice Through The Looking Glass The 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." Here we are, some 41â„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" approach. 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 2007. 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.