Bubble or Recovery?

I have heard a lot about recovery stories last couple of months. Brokers are telling me that recovery is real, but when I talked to economists, they are selling me the opposite story. So, who is telling the truth here?

So the easiest way out of this rumble is to ask what constitutes a bubble and a recovery and let the data make the final justification for it.

Bubble is a condition where prices are shooting higher and higher without strong and sustainable economic justification to it. Liquidity and shift in relative risk preference in the space of profit optimization could be the driving forces. On the other hand, economic recovery is often associated with stable growth in industrial production along with greater demand in labour. Unemployment rate usually trended downwards on sustainable basis with some signs of support for wages.

Between the lines of the writing on the Wall Street, we often led to believe the recovery is real as asset prices like commodities, metal, currencies, bonds and stock markets are leading the change – change for better, I guess. Governments are committed to support the economy and the Fed will continue to stay supportive until and unless recovery is deeply rooted. By all means, they are there and will be there to ensure that the world economy will not go to hell in a hand-basket.

In my recent meeting with some Chinese officials, I am convinced that banks in China are positioning for a bubble to burst and to take position on it. They are conserving cash, cutting lending and ready to work along with the central government to support the economy again.

Recruiters and bankers say the hiring is really yet to pick up. They told me that bubble-fueled recovery is highly unlikely to be sustainable, yet to feed into job market. Broad unemployment in the US is still rising, a normal pattern even after economies begin to emerge from recession. But economists say that any early signs of job growth are a prerequisite for a more solid-based recovery — one in which more confident consumers, and not just huge government stimulus packages, can play a role in lifting the economy.

But on the other hand, the US dollar is sliding to a new trade-weighted low as month-and quarter-end rebalancing flows moved into commodity currencies and equities, indicating some forms of acceptance of risk in the pursuit of yield. The tide could turn fast, in speed unimaginable, pretty much like art of earth-quake forecasting.

In short, this is a trading market. Never take long position because you may not have enough time to shift. Duration of bubble-feed recovery is generally far shorter and more volatile than the reverse causation.