Anyone wanting to sound wise and prescient when talking about the stock market and global economy has, over the past two years, sounded like the mythical doomsayer Cassandra. However, sentiment has changed abruptly this year as spring turns to early summer. After months of catastrophically bad news, even slightly less worrying data is now enough to lift markets.
Investors are prone to ignore weak fundamentals and focus too much on questionable green shoots of economic recovery. Many simply want to go back to the good old days of partying which existed before the credit crisis. There is a danger that those who have warned about moral hazard will be proved right. We are failing to learn lessons, and risk creating an even bigger crisis in the future.
The world may have escaped another great depression, but most economies still face a long drawn-out recession. Since markets hit a nadir in early March, however, people who had been expecting something akin to the end of the world have suddenly seen light at the end of the tunnel. Markets around the world have rallied. But they look set to disappoint again if the proverb about selling and going away in May is anything to go by.
Punters have only themselves to blame if the rallies lose steam. But many are betting that unprecedented actions taken by governments and central banks around the world will be sufficient to reinflate the global economy. The old argument is that the equities market usually recovers ahead of the broader economy. But this view lends prescience and rationality to the stock market it ill-deserves.
Fundamentals have not improved. The jobless rate in the US is at a 25-year high and house prices remain depressed and may have further to fall, though sales have picked up in the past month. In the current reporting season, earnings posted by companies in Hong Kong and the mainland have been mixed. As an engine of world growth, China's economic recovery remains the most important, but it is also one of the hardest to read. America is now starting its own earnings season and the numbers from US companies are likely to prove terrible. However, if the current mood persists, anything less than disastrous is enough to placate investors.
In this context, the stress tests of 19 major US banks fit the recent euphoria over not-so-bad news, as opposed to disasters. The results will not be made public until tomorrow, but early leaks say about 10 banks need to raise a manageable amount of new capital - none, however, will need more money from the taxpayer as a bailout.
Central banks and governments around the world have blown up public debt and money supply in repeated bailouts that risk triggering serious inflation. Such actions were necessary, they say, even at the risk of severe moral hazard because any market collapse posed a systemic threat. That threat may have been averted but the ensuing recession is likely to prove longer than current market optimism suggests. Lessons need to be learned. Green shoots and recovery must be accompanied by meaningful changes to financial systems and institutions, along with a vigilant stance against inflation. Otherwise, they will prove more dangerous by laying the seeds of future crises.