Reality Sinks In For Wall Street

The massive increase in the money supply has triggered a big rally in the S&P 500, which is up more than 20% from its November 20 low. The problem with this rally is that it has been a purely liquidity driven rally. No real attractive alternative asset can be found as the massive liquidity glut has made almost everything look overvalued, and so some of the liquidity has spilled over to the stock market.

The problem is that the underlying fundamentals for stocks remain as terrible as ever, which reports of big job losses not to mention earnings warnings for 3 large companies, Intel, Alcoa and Time Warner today illustrates.

Perhaps the liquidity glut and the lack of good alternatives this has created can continue to prop up stocks despite deteriorating fundamentals. But as there has been periods in the past where high money supply growth didn't stop stocks from falling (for example in 2001), the risk is high of another sell off as the bad news continue to come in during the upcoming earnings season.