There's no doubt the current sucker's rally is a mini-bubble, at least in stocks, Treasuries and the USD. But the force is strong, as demonstrated repeatedly over the past few weeks by the market taking bad news as no-news and not-extremely-bad news as great news. And bubbles can last much longer than possible, as demonstrated by many great prophets of doom having predicted ten crises out of three over the past decade.
While it may be futile to predict the timing of bubble burst, it's at least somewhat amusing to imagine how it could take place. So here I go, if only as intellectual masturbation.
- Current earnings season turns out bad. But this is unlikely, judging by the market's bias of bad news = good news. It may dampen the sucker's rally, but it'd take a few disastrous earnings from heavyweights to prick this bubble. Since several heavyweight financials, including GE (that's a joke haha), have already released earnings and the market saw that it was good (haha again), I bet earnings is not it.
- GM and Chrysler bankruptcy. This could set off some global chain reaction in US (jobs, parts, services, etc), Germany and Japan (US government subsidy of Ford (F) and legacy US cars), China (parts), and who-knows-where in who-knows-what ways.
- Central and Eastern Europe currency and debt crisis. This could set off some global chain reaction, starting from Austrian/Swiss/Italian banks and on to the rest of Europe, possibly further to US banks -- I doubt anybody can rule out the last part after Lehman (LEHMQ.PK) contagion.
- The highly expected/hoped-for recovery never comes. If all else fail to prick the bubble, this one will bite us in the (rear)end. There will be a point where people cannot hold their breath any longer. The world economy doesn't recover, but stablizes somewhat. But the Fed has to continue printing money to prop up banks. USD collapses (no worldwide crisis, no reason to park money in USD -- the only way to maintain a strong dollar under the current circumstances is to make sure there is a worldwide crisis). Inflation surges, without real growth. Food and gold prices surge (I'm not so sure about oil and metals). Even housing prices might recover in this scenario, but would collapse as soon as the government's efforts in supressing long-term interest rate and forcing lending (mostly through GSEs) stop. And stop they will. The first part will stop because foreign demand for long-term Treasuries have already begun sliding and Fed buying has to stop at some point when the non-productive nature of such financial masturbation becomes undeniable. The second part will stop because the world will start pricing in GSE risk as part of US sovereign risk as soon as world economy stablizes somewhat (see above on worldwide crisis).
- A major bank failure. This is THE only way to solve the problem at the root, shocking the regulatory, corporate governance, and market systems back into a healthy state. But it's not gonna happen, not before Step 4 above is implemented.
Disclosure: No positions.