The bull market is entering its third year according to highly regarded technical traders quoted by Bloomberg, including Laszlo Birinyi, who was one of the most timely analysts to note the beginning of a reversal in the market around the beginning of 2009. There is no shortage of predictions about how high the market should go, and even a man like Marc Faber doesn`t have any qualms about advising people to invest their capital in stocks. He anticipates that inflation will appreciate the prices of all assets without discrimination between fundamentals or future performance.
The stock market is clearly in a bullish phase. This is coupled with similarly strong performances by carry trade currencies and most commodities, and seems to justify the general asset price inflation scenario favored by a majority of technical traders. But while it is true that prices have strong bullish momentum at the moment we find it hard to qualify this as a true bull market or its inception, and instead see the present phase as a sharp and volatile period in a longer term bear market, at least in inflation adjusted real terms. To justify this it is possible to advance many arguments on the basis of fundamental analysis, but there is a particularly interesting fact that makes this sharp rebound a questionable beginning for a bull phase. We know that the bear market turned into a bull market in such a short time that it is impossible to propose any kind of fundamental improvement, shift in mentality, or breakthrough to explain it. Instead we have the reversal in the blink of an eye, generally in synchronization with the actions of Ben Bernanke and his accomplices around the world, and with only some cosmetic concern about what needs to be done in order to avoid a repeat of the crisis.
In short, we went from a downhill crash to a skyward jump with some timid bullishness, and such a pattern may not usually signal a long term reversal. We do not question the market`s present direction, but only its duration and volatility. These two criteria indicate that the recent turnaround, while profitable when played at the right time, is in fact a potentially dangerous reaction phase boosted by euphoria and perhaps groundless optimism about the recent numbers, but we admit that we may be wrong.
And yet, what happens if we are wrong? If it turns out that the Fed did manage to jump start the economy in 2010, if we find that the numbers that we have been receiving from the U.S. were the beginning of a multi-year long bull market, we would be faced with a repeat of the events of 2007-2009, because as most people would remember, the Fed`s successful revitalization of the U.S. economy in 2001-2003 did in fact lie behind the subprime mortgage crisis and its financial repercussions. Mr. Bernanke is willfully pursuing the same methods that were proven to have failed back then, but he is pursuing them even more aggressively than Alan Greenspan, and we can`t explain his choices other than by assuming that, as an academic, he is performing a grand experiment to establish once and for all the validity of the ideas of his ideological master Milton Freedman.
To err once is human, to make the same mistake twice, however, is criminal. We are puzzled that there are no three strikes laws for Fed officials, so that if they make the same mistakes twice (or thrice, or more), they do not end up in a prison, sharing the same halls as that by now legendary master of financial engineering, Bernard L. Madoff. After all, it requires only a slight exertion of one`s mental powers to establish a scenario where the U.S. economy`s present state is defined as a complete Ponzi scheme, with the speculators who come first to exploit the Fed chairman`s forbidden fruit running away with what they make, while the rest have to live in the smoldering ruins of what is left to them. But only time will tell who is right about the mayhem or paradise that central bank heads around the world are constructing.
