Is the Market Rally “The Real Thing” or Just More Perception Management?

The rally is being spurred on with MOPE (management of perception economics) and is nothing new. The question is whether the market is falling for the MOPE or whether it knows that the path in the EU is that of inflation to prop up the toxic debt load.

If the market is falling for MOPE then it really is stupid, but just might get lucky. On the the other hand if it’s sum is smarter than it’s individual parts, it might know that inflation in the Eurozone will be met with even more inflation from the Fed and may reason that the juice will be there for a tasty run in speculative leveraged bets like derivatives, commodities, and the stock markets. Yeah baby, risk on!

If the rally continues it is because another Brinks truck has arrived at the Casino with fresh cash. There are cargo planes circling, awaiting orders for strategic airdrops of palletized bales of $100 Federal Reserve Notes. The rally has nothing to do with a sick fantasy that any of the world’s debt crisis has been solved.

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Is the Market Rally “The Real Thing” or Just More Perception Management?

Submitted by Charles Hugh Smith from Of Two Minds

A few charts call into question the current euphoric rally in most global stock markets.

The growing consensus among technical and fundamental analysts is that the stock market has bottomed for the year and is now in full rally mode. There are five basic arguments in favor of a “real thing” rally that runs higher for months to come:

1. Stocks almost always rally in November-December, and end in positive territory in the 3rd year of the presidential cycle (2011)

2. September data in the U.S. was mildly positive, fears of recession have faded

3. Corporations like Google and Catepillar are posting blow-out earnings

4. Europe is finally solving its debt crisis in a comprehensive fashion

5. China is still growing and thus is still the tugboat pulling the global economy ahead

There are seven factors on the other side of the ledger:

1. The ECRI announced the U.S. is already in recession: ECRI Recession Call: ‘You Haven’t Seen Anything Yet

Recession is a binary: the U.S. is either in a recession or it isn’t. ECRI says it is, the stock market is assuming it isn’t. Only one can be correct.

Question: if the U.S. is already in recession, how can that be positive for incomes, tax revenues, sales and ultimately, corporate profits and stock valuations? Bulls have to answer this question; ignoring it is not an option for any risk-conscious investor.

2. China’s stock market has failed to join the global euphoria: The Shanghai Indicator (dshort.com) has fallen to multiple critical support levels and is still declining.

Question: if China’s growing so wonderfully, then why isn’t it own stock market soaring? Perhaps the data supporting the official story of 8-9% growth (as usual) is more “perception management” than reality. If it was real, then why aren’t Chinese stocks soaring along with other global markets? Once again, Bulls have to explain this disconnect; ignoring it is not an option for any risk-conscious investor.

3. Despite its 7% rally yesterday, copper is in a clear technical decline. Given its historical role as leading indicator of stock market trends, then this suggests global markets are due for a massive decline, not a rally. Bulls have to explain this disconnect; ignoring it is not an option for any risk-conscious investor.

Here is a chart of copper, courtesy of The Chart Store (subscription required to access a vast array of financial and economic charts):

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4. If the E.U. solves its debt problems by effectually transferring bad bank debt to the sovereign balance sheets of Germany, France, Finland, et al., then taxpayers will see their incomes significantly reduced by austerity and higher taxes, in both debtor and “savior” nations.

Incomes and GDP are already declining in the weaker EU nations which have supported Germany’s export-dependent economy by importing billions of euros of goods from Germany. What happens to German exports in Europe as its customers’ economies contract?

Question: how can lower incomes, and thus lower sales and lower profits, possibly be supportive of higher stock market valuations? There is no free lunch; the hundreds of billions, and possibly trillions, of euros needed to save the banks and bondholders from losses will come out of the pockets of taxpayers and recipients of State/government payments. That necessarily means those taxpayers/recipients will have less income and thus less money to spend. More government revenue will be devoted to interest payments, and so less will be available to transfer to citizens.

Question: will the supposed benefits of saving large European banks via massive taxpayer-funded bailouts offset the declines in personal income which the bailout will require? How is a dramatic decline in personal income supportive of higher profits and higher stock valuations? Bulls have to answer this question; ignoring it is not an option for any risk-conscious investor.

5. Technically, the chart of the S&P 500 has some bearish elements:

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