he global capital-market rally since the March lows was a great trading opportunity, but the rally may have been based on shifting-sentiment (as opposed to structural improvements in the economy). The market was “pricing in” (or hoping for) a quick recovery; even though there was no evidence to suggest clear-&-compelling improvement in GDP, employment, deleveraging consumers, or corporate earnings.

• Yes, the government was able to stop Financial Armageddon; but that’s not the same thing as an improving economy.
• Yes, the US economy is resilient and will recover and prosper in the long-run. But “In the long-run, we’re all dead”, to quote the Nobel Prize winning economist Keynes.

Like the cartoon character that has run off the ledge of the mountain but has not yet noticed the fact that he’s running on thin-air, once equity investors look down it may get ugly.

Neither Borrower, Nor Lender Be

Whether you’re a bull or a bear, we can all agree on the following fundamental-facts:

1. Deleveraging Consumers and Businesses. Everyone (except for the government) is tightening their belt and reducing their consumption. Government alone cannot carry the economic load forever, and if consumers (or businesses) don’t quickly step in we may face a double-dip recession. The $64,000 question is: How does the private sector look (or what’s left of it)?
2. Unemployment Is Above 9% and Climbing. Unemployment is a lagging-indicator, and historically continues to get worse even if the economy picks up. This bit of bad news is not going to get better anytime soon, even if you think the economy is recovering now!
3. Depressed Wages. Many corporations take advantage of high unemployment levels to keep wages down for their existing employees. This makes sense for the firms (the weaker economy justifies lower wage growth) but it has the unintended consequence of reducing the purchasing power of those already employed.

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