From early March lows, the U.S. market has roar back — in fact, in terms of the greenback, the dollar has had the best four week back-to-back series of gains since 1933.
Yet it's a given that first-quarter economic data and earnings will be disappointing. So are investors setting themselves up for a nasty fall? Will this rally come to an abrupt screeching halt?
David Roche, global strategist at Independent Strategy Ltd., thinks the rally will peter out once investors realize that economy is not recovering as the market had anticipated. He gives two reasons.
"First of all, because the credit machine is still broken, and credit will still contract. Therefore the consumer and investment are simply going to be out of the game, insofar as they need credit to grow. The second thing is even if they had credit to grow, you have the consumer, and indeed businesses too, deleveraging. So in other words, it is the demand side for credit which is now causing the deleveraging," Roche tells CNBC.
So what of the policy initiatives that Obama, the Treasury and the Federal Reserve is throwing at the economy?
"They're just all wrong. Basically 90 percent of what the U.S. government has done ... has been to try and add leverage to the government balance sheet in order to sustain an unsustainable level of leverage in household balance sheets, so that the consumer will go on consuming exactly as he did in the past," Roche said.
Roche adds that this approach will simply not work, as the deleveraging process is now being driven by a returns to thrift and hard work. In a sense, the U.S. government is rowing the boat the wrong way, while telling the world it would like to help set up a stable financial system.
"In fact everything it (U.S.) is doing is to make the system more unstable, and using increased amount of leverage to do so, to recreate an American Dream which turned out to be a bit of a credit-driven nightmare," Roche said.
A better approach would be to let asset prices fall to the right level. That way, the remaining wealth in society, which is always a vast majority of wealth, will find cheap assets to buy. Additionally, in an economic downturn, although jobs are lost, a significant number of the people will keep their jobs. Earnings will actually grow in real value because of deflation. That's how economies recover.
"What does not make the economy recover is trying to maintain yesterday's dream by borrowing a lot of money on the Fed balance sheet to do so. That simply will not work, Roche concludes.