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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

February 12, 2010 at 10:15 AM

Why the stock market will have to find new fuel for a rally

Top of the News: Is the 2009 rally over? As the Dow stays in negative territory this morning and is just one minor swoon from falling below 10,000, it’s worth asking.

Recall that the big boost last year came from zero-interest rates, relatively cheap and very abundant dollars, the federal stimulus and the carry trade arbitrage — not especially from fundamental strength in the real economy. Goldman Sach’s big profits came from its trading, not from raising capital to start and expand businesses. Now, as the Fed plots its so-called exit strategy from monetary expansion and the stim winds down, many of these drivers will slow down or go away.

Like an alcoholic, Wall Street has its moments of clarity. There it sees high unemployment — the worst since the Depression by many measures — ongoing foreclosures, bankruptcies, etc. Persistent unemployment is especially worrisome (much more so than the feigned terror of reregulation that won’t happen, or will be weak — and in any event, would sustain profitable, honest business). Commercial real estate could implode, too.

Now the crisis in Greece and another sign that China fears a bubble have traders pulling back. Until these global dangers are addressed, or some new mini-bubble is produced, we may have to say, Adios, 2009 rally.

The Back Story: The economist shorthand for the European Nations that are struggling with sovereign debt issues: PIGS. I.e., Portugal, Ireland, Greece, Spain.

Greece accounts for just 3 percent of the Eurozone’s GDP. But NYU Economist Nouriel Roubini warns that Greece is too interconnected with the EU, and thus the global economy, to be allowed to default. As a result, intervention may be needed not only from the European Central Bank and stronger EU economies, but from the IMF. Harvard’s Jeff Frankel goes into the issue in this thoughtful post. I’ll let you make the PIGS squeal jokes on your own.

A larger issue is that two years into the worst of the crisis, we still haven’t addressed systemic risk.

Today’s Econ Haiku:

Bellevue streets, so wide

They could handle trains and planes

I dig a tunnel

Comments | More in Eurozone, Global economy, Stock market

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