There was a huge and unparalleled deflation from the crisis, the magnitude of this cannot be overestimated. This was decades of economic flotation, started by the policies of Volcker (the tragedy is the US economy does not need this kind of stimulus) drained away almost in a moment. Do you remember what the market was like during the crisis ? That was deflation.
A coordinated financial engineering exercise (not unprecedented, but unprecedented in its sophistication) was called into play to alleviate this and it worked, as much as it could. That ocean which disappeared was refilled to an extent from a reservoir, but one from the future (where the costs of super cheap $ are). I assume this was done to shorten the interregnum to a real recovery.
One might even say draining this ocean was necessary for a real recovery. This flotation had distorted the economy and market (I have been examining the extent of this distortion, whether is caused mis or mal-functions in the market in this blog, simply put whether the market is damaged).
Keeping dollar cheap has resulted not in productive investment, but in new bubbles, in the stock and housing market. That worries me, not the stock market because it is already bursting (the news today), but the housing bubble, becuase if that gets reignited we are back into this mess again. But maybe the figures today will help ensure this does not happen.
In all events US companies do not need this kind of help, they flourish without easy credit (I have discussed this as well). This cash did go into stocks, but it was sloshed from sector to setor, until the realities of the market intervened. It triggered overbought readings on RSI and other (analysis were warning about this for months).
This triggered the inevitable slide back. It would have been better if it went into good investmeents, such surges tend to be more sustainable. Short of banning RSI there was nothing which could have been done to stop this.
Read my post yesterday about why I saw optimism in the figures before NFP and you can see why I see optimism in the NFP figures. They suggest the beginnings of real growth in the economy the kind of thing which triggers huge sustainable surges in the Dow.
But I or anybody else can be optimistic until the cows come home but it does not stop a hard rough deep recession (what else can they do to reflate ?) unless the market feel this way as well.
But, something today supported this optimism, the floor under stocks and USD. Note how both rose together in the afternoon, resonating one hopes with the real job creation in those figures. The morning light, but the hard light of computational science...
UPDATE COMMENTARY 03/05/11: I should not that the performance of the Dow since this post has led some support to the ideas above. There has indeed been a recovery in industrial jobs and the market has kept rising, so far, with money flow bumps along the way.
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