The rally has been powerful lately…
It seems that stock speculators are not just pricing in future recovery, they are weighing in on the past and concluding that the tumult of the fall of 2008 was an overreaction.
The “green shoots” now visible, why not make a bet that the financial panic of 2008 was a temporary and overblown phenomena and scoop up stocks on the cheap?
That question and the current rally define the problem itself.
There is too much faith and speculation in rising stock markets and too little respect for risk.
In a lot of ways this rally is reminiscent of the great run-up of 2006 and most of 2007… the writing was on the wall… most any observer could see that there was significant trouble ahead but the collective wisdom yielded only more conviction that stocks were headed higher.
We know differently now… stock seriously crashed and the discount mechanism that is the public stock markets again showed itself to be a myth.
As I have said before, I believe that what we have been experiencing since early-2000 is NOT the typical boom-bust pattern the business cycle established in the decades following WWII but rather a generational unwind whereby all the mistakes (… especially those that were “managed” or mitigated through the actions of our strong central government including the Federal Reserve) of prior decades crescendo and morph into a prolonged period of decline.
The stock markets peaked in 2000 (in real terms)… the job market peaked in 2000 (in ratio terms)… the massive commercial paper market has now contracted to a point well below the lows of 2002… What followed in the wake of the dot-com bust is now generally know to have been a fraudulent economic “recovery” without the jobs and now without all the paper wealth.
But the speculation drum beats on… there are more ways to get in on some form of stock action today than ever before and everyone is doing it.
So, the rally is strong… the same participants that were clueless in 2006 and 2007 and broke in 2008 suddenly seem like moguls again… financial geniuses… going long and salivating form more.
But this collective delusion is exactly what will be punished in time.
True capitulation is not a one day, week or month trading event… it will take some time to beat the speculative spirits out of market participants after so many years of distorted economic times.
But beat Mr. Market will.
The following is a comparison between the massive stock bounce that occurred in the wake of the great crash of 1929 and our current great rally.