Debunking Recovery Hype

The bear market is over and a new bull market is back – at least that is the conventional wisdom of the top 55 economists, who predict that the economy will grow in the fourth quarter through the first half of 2010.

Having said that these are the same economists reported that the economy was in the ‘worst recession since the Great Depression.

What really change between then and now is – psychology.

As optimism builds, so does the perception of a recovery. It is to be expected, after all, the simple truth is that investors, advisors and analysts alike herd. It is all too similar to the optimism I observed in late 2007 – when various markets stood at or near all-time highs.

One has to balance with the reality – that large pockets of the US real estate market are till racking up record monthly foreclosures. Bank credits and M3 have been contracting at rates comparable to the onset of the Great Depression.

Robert Prechter, one of the great Elliot Wave theorists that I have a great respect, says limited gain remains possible, but various technical measures, historical correlations and sentiment extremes all suggest that the rally is waning.

Economists’ opinions lag stock trends and series of valuation indicators such as annual dividend yield and price/earnings ratio are remain at exceptionally bearish levels.

Hong Kong billionaire Li Ka-shing who predicted China’s stock market bubble would burst in 2007, said the global economy would not recover this year and told investors to be “cautious” about buying shares, especially with borrowed money. “The worst is over for the global economy,” Li, Asia’s second-richest man, yet it’s too optimistic to say the global economy has reached a turning point. The degree of decline has shrunk but that doesn’t mean it has stopped shrinking,” he said.

With 69 failed US banks already this year, bank failures are already on course to exceed the number of failures in 2008 by 400%. However, if they continue accelerating, that increase could easily rise to 500% or 600%.

In short, the same Wall Street banksters who are leading the chorus of “happy days are here again!” are the same individuals throttling the U.S. economy through reduced lending and credit – the exact opposite of what they predicted they would do, once they got their $10 TRILION in hand-outs, loans and guarantees.

Does this sound like an economy which is “recovering”?