The economy is a man made mechanism, that is nothing more than a series of equations... currently we are in this equation: dollar down allows (all) markets to go up and inflation rises. The opposite holds as well, at this juncture... dollar rises, hence (all) markets go down and we are stuck in deflation.
The economic worries and concerns have by no means ended. No way, no how. I am, and investors in the market, should be fully aware that this market was allowed to rally because the banks were able to ease the mark-to-market model... This is why I linked the article concerning the assets that are going to be brought onto the bank balance sheet, as it will have negative implications.
But... and I stress, we will not enter another depression. The Fed will not allow it. (And I am unquestionably certain that I would rather have a temporary high deficit versus Central Park being a massive tent city. period.) So when I see videos of Elizabeth Warren talking of financial institutions, I am not so worried. Its not that I do not respect the awesome negativity we are in, its just that we have taken the steps to ease the panic.
As such, I do not see another credit crisis arising, despite the commercial real-estate storm, which I am very familiar with. With the current rules in play, and low interest rates, the banks will earn their way out of it.
And here in lies the trick... The banks will need to start lending, to truly earn their way out. If they expand their lending, inflation will rise, especially since the biggest driver of deflation (declining credit and housing prices) have stopped going down.
Now, with banks theoretically at bay, because of the Fed's action and potential future action, the economy was able to level off. Warren Buffett indicated it was leveling off, and I believe him. Not because he is 'Warren Buffett', but because he has access to such a broad range of sectors and industry insiders, and his high integrity. He is one of the greatest economic barometers investors have, and we should pay attention. With the economy leveled off, the banks will lend.
On the flip side, there are highly regarded investors calling to a dollar reversal. (Thanks Dan) With this call, as per the current economic equation, (all) markets will collapse, deflation is far from over and Central Park will become a tent city.
The beauty of economic equations is that they can change.
Personally, I would love to see the dollar rally, and re-gain its strength. But that is only going to happen one of two ways at the moment:
1. Fear - panic re-enters the picture, and investors flee to the biggest swinging dick (ie American Military... America) for safety.
2. Policy Change - Taxes rise (increasing gov revenue) w/ spending cuts.
I do not see #1 happening again. That is my money making, non-professional, anonymous blogger opinion :)
I do strongly see #2 coming into the picture, and very soon. But its effect will take time, and in the transition we will see some side effects of too much stimulus. As the old equation will slowly die from the policy change.
This policy change will mean less money for consumption, and mute economic activity, which I am sure the markets will anticipate (and should not lead to a March low re-test or breach). The policy change should lay the foundation for economic growth, which the markets will anticipate when the time comes.