The bulls are back in full force on the networks during the weekend. “As more third quarter results are scrutinized this week, we are going to go well past 10,000 (Dow), this time decisively,” a prominent CNBC contributor insisted. And, quite clearly, the overwhelming majority of Wall Street analysts are convinced that the worst is behind us.

But what is being scrutinized is corporate performance in the midst of an environment which is heavily loaded with government intervention. In fact, what is behind us is the first round of stimulus plans, bailouts and rescue packages. What the future holds is the continuation of this massive trial-and-error programme targeting the elimination of systemic risk in the financial, housing and consumer sectors, in no particular order. The International Monetary Fund is predicting that governments will begin unwinding intervention-related commitments by mid-2010; the fundamentals, however, point unequivocally in a contrary direction.

The shock waves from India’s Red Corridor failed to dampen bullish sentiment as the Indian stock market began celebrating key year-on-year data yesterday. Maoist guerrillas blew up railway tracks, burnt down train stations and destroyed transmission towers across the states of Bihar, Jharkhand, Orissa and Chattisgarh. But the Sensex index still surged past the 17,000 mark on impressive industrial production numbers.

Industrial output grew by 10.4% in August (year-on-year) as stimulus money revived demand for household goods and cars. “Foreign institutions have invested more than $12 billion in the Indian stock market during the first nine months of this year based on valuations,” said a senior officer responsible for foreign accounts at Citibank, Mumbai. “With blue chips yielding as much a 17% return for the third-quarter period, we expect sentiment to remain positive well into 2010.”

There is, of course, no consensus on the potential impact of the $10-$11 trillion worth of outstanding residential mortgages on the banking system in the event of a delayed recovery. The Obama administration, preferring not to indulge in any negativity, has a simple theme: just keep the mortgage sector alive long enough for an economic turnaround to remedy all the inherent problems. But eating away at the dubious merits of the wait-and-hope approach are the mathematical realities which have not been factored into the government’s foreclosure-prevention exercise which, according to Treasury officials, is getting an enthusiastic response.

Treasury Secretary Timothy Geithner announced last week that 500,000 financially-troubled homeowners were now participating in the government’s foreclosure-prevention plan. Under the plan, those behind on their mortgage payments and those facing imminent default can apply to reduce their monthly payments in line with monthly incomes. Bank of America (BAC) and Well Fargo (WFC) have begun “trial” modifications for 11% and 20% respectively of their eligible borrowers who are at least 60 days past due; Citigroup (C) has started modifications for 33% of its eligible borrowers, and JP Morgan (JPM) for 27%.

After depleting its lending resources at the height of last year’s meltdown, the IMF has managed to conclude an impressive $750 billion worth of borrowing deals with Group of Twenty members. And, given the line-up for IMF assistance, there is every reason to believe that a good portion of the money will be put to use in 2010. Where that money takes the global economy however, is open to debate.

Ukraine, the beneficiary of a $16.4 billion IMF emergency facility in late 2008, is already in default, despite receiving overly generous terms. “If it were not for geopolitical concerns pertaining to Russia, Ukraine would not be demanding, and getting, its loan installments under the facility,” said an IMF official on the sidelines of this week’s IMF-World Bank summit in Istanbul. “On sheer economic grounds, Ukraine is a Latin American-style basket case.” Five--year Ukraine credit default swap rates are being quoted at 1,200 basis points; Argentina, which is hoping to restructure $20 billion of defaulted bonds shortly, is the second most risky sovereign with CDS prices around 1,100 bps and a default probability of 52%.

Between the billions of dollars lost in valuations and the thousands of investors who simply said goodbye to the markets since September last year, nobody is quite sure how much of estimated $7 trillion of privately-held “offshore” wealth still rests in Switzerland. But Swiss banking insiders concede that their country’s claim to controlling 30% of the world’s “hot” money is certainly subject to debate.

And, any further deterioration in Switzerland’s status as a pre-eminent safe haven could seriously impair the profitability outlook for Union Bank of Switzerland (UBS), Credit Suisse (CS) and a number of elite private banks in Zurich, Geneva and Lugano.

Goldman Sachs (GS) analyst Richard Ramsden says that the bigger banks have increased their earnings potential “mostly via long term accretive deals.” But Mr. Ramsden fails to recognize that the real driving force behind the recent process of accretion in the financial services industry thus far has been government aid and intervention, in one form or another.

On Monday, citing an improved earnings outlook, Goldman raised its call on Bank of America (BAC), and other Wall Street majors, to “attractive” from “neutral”. But that outlook is premised in the hope that even a weak recovery will result in a decisively positive credit and investment environment.

The larger-than-life portrait of Mao Zedong was clearly fodder for the millions of Chinese peasants and workers watching last week’s grand parade on television. Because those occupying the podium at the Gate of Heavenly Peace knew full well that the ideals and agendas of the 1949 revolution had long been abandoned. And despite President Hu Jintao renewing his commitment to socialism, China is in no danger of turning into a proletarian state at any point in the next few decades.

On the contrary, there is every reason to believe that Mao Zedong is turning in his grave. Foreign and domestic equity has flourished in China’s special economic zones since the early-1990s and, of late, land ownership laws have been amended to encourage private holdings.

Roberto Baggio (Seeking Alpha, September 24, 2009, Ten Reasons for an Imminent Stock Market Crashseekingalpha.com/article/163213-ten-reasons-for-an-imminent-stock-market-crash) wonders if someone has “waved a magic wand and fixed Europe’s problems overnight.” Well, in beautiful Riga, which lays claims to putting up the first evergreen Christmas tree in 1510, the holiday season is already in full gear; nobody in the historic city centre appears too concerned with the fact that Latvia’s economy is facing an 18% decline in 2010.

In fact, the “magic wand” was waved by the IMF and the EU who recently arranged a US$10 billion emergency loan facility for Latvia. Without that money, a significant devaluation of the Lat was inevitable. And, without doubt, devaluation in Latvia would have caused a chain reaction in the Baltics, renewed doubts over the health of more than a dozen Nordic banks and a renewal of uncertainty in other former Soviet satellites and states.

Price-makers seeking above-average profits in the OTC derivatives marketplace invariably find themselves entering arenas which defy consensus risk assessments: thinly traded foreign currencies, extended contract maturities, non-existent benchmark instruments, variable contractual terms, multi-jurisdictional exposure and diverse counterparties. One component of risk in OTC trades lies in fluctuating at-liquidation prices.

But it is the second component, broadly termed “counterparty risk”, which continues to defy quantification.

In a climate where economic planners and market participants are desperate for credible bullish signals on the global economy, it is not surprising that there is hardly any focus on the fine print in the IMF’s semi-annual World Economic Outlook. On Wednesday, the IMF revised its 2010 global growth target to 3.1%, up from a July forecast of 2.5%. But the explanatory memorandum accompanying the revision contains two alarming qualifications.

Firstly, both developed and developing nations will need to prepare for the unwinding of extraordinary levels of public interventions by early next year. Secondly, banks and businesses in emerging markets must service (i.e. refinance) more than US$400 billion in maturing debts, denominated in foreign currencies, over the next six months. Once the two challenges are properly contextualized, it appears that the IMF is pointing towards another serious recession in 2010, not any growth on a global basis.

“Despite significant hurdles, GDP growth for 2009 will exceed 7%,” India’s chief economic planner Montek Ahluwalia has been repeating in recent media interviews. And, with the Sensex rising above 17,000 points yesterday on steady buying, few analysts are prepared to make a short call on the Indian stock market.

Fewer still are bothering to look closer at the “significant hurdles” which plague the Indian economy. Though the Indian government claims that, with ample food in storage, there is no threat of widespread hunger, the weakest monsoon season since 1972 has wreaked havoc on millions of farmers, many of whom have already defaulted on loans to banks and private money lenders. During the height of last year’s downturn, more than 10 million workers in the “unorganized” sector, India’s largest labour pool, either lost their jobs or were forced to accept drastic reductions in wages and working hours. And, with the prices of basic foodstuffs like lentils, sugar and vegetables at historic peaks, it is not difficult to visualize the fate of the 500 million-plus Indians living below the poverty line.

An obviously worried Chinese Prime Minister Wen Jiabao wants assurances that China’s $696 billion investment in US treasuries is safe. But dissidents inside the Chinese Communist Party are urging the leadership to focus elsewhere. “If we cannot resolve the acute political crisis this nation is facing today, the entire foreign reserves portfolio will have to be revamped anyway,” a Beijing University economics professor told journalists on the sidelines of a meeting of a high-level legislative advisory body last week.

On Friday, a veteran Wall Street analyst predicted that, despite recent gains, bank shares now incorporated significant further upside. “Within weeks, we will see major changes to mark-to-market and fair-value rules,” she told CNBC. “The changes will enable the banks to rationalize solvency ratios in the current climate, to get on with their business and to post higher operating profits.”

Last week, as Standard & Poor’s revised its India outlook to negative (from stable), credit default swap spreads for State Bank of India and ICICI Bank (IBN) rose to levels not witnessed since last November. Today, as Pakistan’s opposition parties start their “long march” to Islamabad, Pakistan’s capital, default risk buyers for both India and Pakistan have retreated altogether. Depending upon how unstable Pakistan looks by the end of the day, sovereign risk perceptions for a number of Asian countries will deteriorate dramatically going into the weekend.

Two weeks ago, when credit default swap spreads on US treasuries briefly breached 100 basis points, a worried Geneva-based private banker called into one of the better-known price makers to check on traded volumes. “My bosses are asking if we should start factoring default risk into our fair value measurements for government-issued and government-backed debt,” the private banker explained. But his quest for clarity actually led to more confusion and more uncertainty.

At the end of the day, no stimulus plans, regardless of size or direction, will have any sustainable impact if Washington regulators are unable to keep systemic risks in check. Clearly, leaders in Congress are hoping that the trillions of dollars of rescues and bailouts will stem the slide in joblessness, home prices and consumer demand. But even assuming that there are signs that the Obama Administration’s vision of an economic recovery is starting to turn into a reality later this year, the pace of rising systemic risks may well create conditions akin to a major depression and an unprecedented meltdown in equity prices.

Last March, the decision by Fed and Treasury officials to save Bear Stearns was triggered by the imminent crisis in the $2.5 trillion repurchase (or “repo”) market in which banks raise cash from mutual funds, hedge funds, insurance companies and even central banks by posting collateral; the overwhelming proportion of repo contracts are rolled over on a daily basis. Initially, Ben Bernanke and Timothy Geithner (the Fed’s point man on Wall Street at that time) were ready to let Bear fail. “Bear is not one of the bigger firms,” a senior Fed official said at a closed-door meeting which was attended by then Treasury Secretary Hank Paulson. “It does not present any systemic risk.” But the report from those checking Bear’s books painted an entirely different scenario.