Global Agenda: The time has come

"The time has come," the Walrus said, "To talk of many things...- Alice Through The Looking Glass

Thetime which has come is that anticipated in this column on March 27,under the heading "The Relief Rally" and relating to the rally in stockmarkets round the world, which had begun earlier that month.

That column, in turn, opened by quoting an earlier one, beforeupdating and extending is purview: "In mid-February... this columnsuggested that the equity markets were embarking on another sellingwave which would carry them to lower levels than those seen at theclimax of the previous waves, in October and November.

"It further suggested that the levels reached in thethen-imminent leg down would - unlike the series of lows made sinceOctober 2007 - stand for rather longer and provide a starting point fora serious and prolonged rally... [This] forecast has been largelyrealized... Global equity markets did indeed record another sharp fall,which... climaxed in the first part of March... It is no longer absurdto speak of a rally phase in the markets which will continue throughthe 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 maybe, as no more than a 'bear-market rally.' That means that the majorbear market will resume at some point, whether that point is in thesummer or (aptly-named) fall. The bottom recorded in March is notexpected 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 willbe proven correct... [but] it would seem safer to ride the rally butmake sure to exit the market during the summer, than hope that thepolicy-makers have finally tamed the raging bear."

Here weare, some 41/2 months later, with the markets having climbed at least50 percent from their early-March lows, and by much greater margins inthe case of some markets and sectors and of many individual stocks. Thesame forces powering the equity markets have been at work in the bondmarkets, where corporate bonds have recovered strongly from theirdebacle last year, while government bonds have lost ground, and in thecommodity and currency markets, too.

The same pattern is apparent across the board: The morespeculative the market, the stock, or the currency, the more it hasrisen. Indices of small-cap stocks have outperformed those oflarge-caps, and secondary currencies have done much better (against thesafe-haven currencies, i.e. the dollar and yen) than have major oneslike 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 unprecedentedamounts of money poured into the global financial system by governmentsand central banks across the globe have achieved their initial goal ofrestoring liquidity and hence confidence, after these evaporated inSeptember 2008, triggering the greatest financial and economic collapsein three generations.

The debate today focuses on whether these governmental effortshave reversed the deflationary forces at work in 2008, or onlytemporarily arrested them. Although powerful arguments can be made forand against the bullish, the mildly bearish and the very bearish cases,ultimately no one knows. The tempting thing to do is to ride the bulland hope for the best - namely a full recovery and a new era ofprosperity. But the speed and extent of the rally to date is actuallyan argument against this "close-your-eyes-and-hope-for-the-best"approach.

The only thing everyone must leave to hope is that theultra-bearish analysis is wrong and that Bernanke & Co. have doneand will continue to do most things right.

But to hope that prices will continue to rise more or lessnon-stop is, to say the least, foolhardy. As this column has repeatedlyargued, there is no justification to pay attention to the cheerfulanalyses of the big banks - just reread their pre-crash stuff to seewhy. Yet optimistic sentiment is reaching as great an extreme as it didin 2007.

In these circumstances, surely the sensible and prudent thingto do is to stand aside or, better, take cover. Avoiding anotherhammering is far preferable to missing out on profits, because you cansurvive the latter - but not necessarily the former.