Ambrose Evans-Pritchard, the resident Doomsayer at The Telegraph, joins the chorus of bears in arguing that the stunning rally in stocks from their early March lows is a fake.
He says to enjoy it now, but expect to take a sucker punch:
“Prolonged suckers’ rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again,” he said. Genuine bottoms tend to be “quiet affairs”, carved slowly in a fog of investor gloom.
Another sign of fakery – apart from the implausible ‘V’ shape – is the “dash for trash” in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen’s model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.
Keep an eye on the upward creep in yields on the 10-year US Treasury, the benchmark price of world credit. This alone threatens to short-circuit the rally. The yield reached 3.3pc last week, up over 1pc since January and above the level in March when the US Federal Reserve first launched its buying blitz to pull rates down. Bond vigilantes are taunting the Bank of England in much the same way, driving the 10-year gilt yield to 3.73pc.
The happy view is that this tightening of the bond markets is proof of recovery fever, but there is a dark side.
Governments need to raise $6 trillion (£4 trillion) this year to fund bail-outs and deficits, led by this abject isle with needs of 13.8pc of GDP (EU figures). China fired a warning shot last week, saying the West risks setting off “inflation for the whole world” by printing money. It hinted at a bond crisis.
The real problem for the bulls is that the world faces real structural problems now that can’t simply be solved by modest GDP growth. We keep going back to California, but it’s instructive. To operate, the state needs the kind of revenue that can only be produced during a bubble (like the .com one, or the housing boom). Modest growth just isn’t good enough. Given the gigantic debt overhang facing both US consumers and the government, that’s basically the situation we’re looking at. When you look at our shortfalls in so many areas, it just doesn’t look like a modest resumption of growth will do the trick this time.