Markets Stage Strong Rally, Fundamental Problems Still Remain

Wed, Oct 12, 2011 - 12:35pm

Subsiding fears over a near-term European crisis with plans to recapitalize their banking system along with better-than-expected economic data coming out of the US have launched the markets strongly out of their recent new lows made earlier this month.

Recent data from the National Association of Active Investment Managers (NAAIM) also showed that bearish sentiment had recently dropped to levels not seen since the last major market bottom formed in March 2009.

The major question on many investors’ minds right now, however, is “How long can it last?”

It appears that the markets and the financial press are currently fulfilling a recent study released by Nature showing that our brains are hardwired to reject or ignore any sort of negative news. Then again, this study isn’t all that surprising if you listen to CNBC.

In all honesty, recent positive news hasn’t changed anything fundamentally regarding Europe’s wider problems or the near certainty of a global and US recession. But, then again, we could easily dismiss these hard realities for another week, month, or quarter until another crack in the damn sends water shooting all over the place.

With regards to another recession, the formidable ECRI Institute has put its very accurate forecasting credibility on the line—the NY Times reports it has signaled each recession for the last 60 years with only one exception—by not only saying that another recession is absolutely certain, but that they expect to see unemployment “back up into double digits”. Here's one of their more recent interviews at CNBC, which I highly recommend watching if you haven't already:

Even if a recession hits and we do get back up to double digit unemployment, keep in mind the Fed is always willing to inject the banking system full of cash and prevent any sort of deflationary forces from taking effect. For example, here's what the Fed had to say via today's release of their FOMC minutes:

A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.

Interpretation: As the economy gets worse (assuming it really does), the Fed will engage in another massive round of money-printing, or QE3.

Consequently, this will serve to widen the growing disparties between the average American and those on Wall Street and cause the protesters to grow in number.

In the meantime, however, ignore the negative news, demean all those protesting their grievances against Wall Street as lazy or stupid, and take out another loan. Why not? The market is rallying!

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