Reading the Tea Leaves

I should probably leave opining on the stock market to the certified gurus, but the recent market surge has got me wondering if we're seeing a new bubble in financial assets. Recent articles in the Wall Street Journal have reported that the big trading banks (Goldman Sachs, Morgan Stanley, and their partners) have begun to tap the cheap money the Fed has made available through its various new funding facilities. At the same time, the Journal has reported that bank lending to businesses and consumers has reached an all-time low. So where's all the money flooding into stocks coming from? I wonder whether the trading banks have been taking the cheap money from the Fed and using it to speculate on stocks.

Naturally all that money funneling into the market has lifted stock prices and the lift in stock prices has caused further speculation. I just don't see any other way to explain the persistent rise in the market when the economic fundamentals just aren't there: transportation, housing, employment, inventories, production, even most commodity prices--in short, all the indicators--seem to be pointing towards continued recession.

The standard analysis I keep hearing, that stocks are rallying because no investor wants to be the guy who missed the bottom of the market, could be the explanation, but I can't shake the feeling that the rally is being driven by speculative releveraging. And as we have seen, when highly leveraged gambles like this go bust, it somehow always ends up costing the government money.

As I've said, this seems to me like the only good explanation for the recent market rally, but I haven't heard any of the analysts offering a similar explanation. If you're familiar with a "real" analyst who's reading the tea leaves in the same way as me, please let me know by posting a comment to the blog entry or sending me an e-mail.