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Economic Recovery? What Economic Recovery?


Market rally may have been a mere echo bubble.

The sharp reversal in popular sentiment -- from optimism to the widespread feeling that the economic recovery is in trouble -- highlights the emotional nature of this market.

But did anyone really believe the economy was in a full recovery?

The Green Shoot Gang, who took the optimistic view that the decelerating rate of decline in several data points -- especially home prices and unemployment -- signaled a recovery. Of course, falling slower isn't the same as finding a bottom.

Many accurately described the rally from the March lows as a second derivative (or echo) bubble. The faux recapitalization of the banking system, which allowed many financial stocks to double and triple off their lows, are now tempering their outlook, since they recognize that regulation -- and the continued contraction of many revenue streams -- will reduce long-term earnings power.

The second wave of the echo bubble came in the form of the re-inflation trade, or the rally in commodity prices. The Green Shoot Gang has always admitted that the recovery might not be imminent -- the "second half of 2010" seems to be the thickest limb onto which people are willing to climb.

But that didn't matter as much as it might have, because China's recovery was not only imminent, but already underway. And the promise of global demand led to the recent re-inflation trade, which has seen the price of oil, energy, steel, metals, and agriculture products surge some 40% to 70% from their lows of just a few months ago.
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