In this winter of discontent which is taking place during the end of summer, it is interesting to note that the bulls are right.

That is, those who decided the markets and the economy would continue to fall and then fall faster during April, and throughout the summer and bet accordingly … have provided fuel for a striking rally in the stock markets.

This sidesteps what is happening within the ‘real economy’; this continues to deteriorate, not dramatically but in its day- by- day unwinding of companies, workers thrown out of work, states and municipalities with budget gaps the appear hard on the heels of budget gaps …

The real or ‘Main Street’ economies – not just of the USA, but China, Eurozone and Japan – are enmeshed in the matrix of the constricting energy crisis. The crisis is amplified by the endless efforts by governments and the surviving businesses to ‘stimulate’ more and more consumptive business activities … which demand more energy, which supports the price of petroleum even with inventories at historically high percentage levels.

Within the ambit of finance, the sun is still shining; the stock markets are run as branches of the central banks, which create liquidity without end, There is nowhere for it to go … there are few real banks sucking on the Fed teat solvent enough to risk lending to Main Street’s ‘Joe Schmoes’, particularly into an energy freeze- out which constrains absolutely their ability to repay. The funds remain inside the charmed liquidity trap of finance, lifting stocks in a market where trembling individual traders fear to tread unless they follow their betters and fall fully invested on the long side. Ambitious trader- wannabe’s lack the funds – or the inside information – to compete with the Fed’s – and other central banks’ – proxies.

What choice does an ambitious, dexterous trader wannabe have? To be rational is to be destroyed. Long or Short, those outside the liquidity trap lack inside information and the means – liquidity and access to stocks to short – that the Goldmans and Morgans have access to. This is not a market, it’s a scheme and it is simply another advertisement for the extraordinarily dire situation this country – and the other developed countries – finds itself in.

Think about it; the USA stock markets have been riddled by cheating since their inception. At no time have the markets been blatantly supported by the Fed; what other conclusion can be drawn other than failure to blatantly support the markets will result in general economic calamity.

Where there’s smoke, there is fire …

More sinister is the idea that the liquidity trap exists to remove cash from the sidelines and accelerate the bullish trend – without any consideration for the acceleration of accompanying risk. While the bull itself is neutral as to inflation or deflation, any serious decline will be deflationary as in ‘instantaneous wealth- destroying’ deflationary. The Fed can pump the market and can do so for a long time, just like it can buy Treasuries for a long time, but the real world/fake world divergence will become stronger with each passing day. The markets are fake but the losses are real.

I will leave to others whether this is ethical or not, or whether it is good policy to be endorsed by a near- agency of a government. Circumstances call the tune; Bernanke is doing what Kneale and Cramer are doing as touts, luring in more and more suckers. This leads me to believe that all of them are terrified of the current situation … which seems to have changed little since 2007 when central bankers were also acting scared while talking ‘confidence’.

Currently, the rational players are fodder for the bulls, who craft one short squeeze after another – the rational trade is to short, particularly of (the favored) banks, REITs, retailers, automakers, the GSE’s and insurance companies. The rational traders understand that the realities of the ongoing meltdown on Main Street will not allow for increased earnings and cannot support the pricey fundamentals suggested by the current price level.

The rational participants cannot accept that the markets are now Potemkin villages, that the markets won’t be allowed to decline, that the markets are pretend to be markets … but aren’t, really.

The super- rational trade is to stay in for the long haul on the long side; the Fed and other central banks have no stomach for a bear market and will do whatever required to prop up stocks – the good, the bad and the indifferent. The theory is that the rising market can create sufficient asset collateral value to offset losses that are accruing in other parts of the various players’ balance sheets.

Offsetting losses can be done by secondary offerings. Since stock prices never go down – at least in the ‘new, Bernanke market’, the dilutive effects of such offerings don’t much matter. The desperate necessity is to pump … punp for your lives!

As the divergence between stock market irrationality and the dismal reality taking place in country outside of Wall Street creates more incentives for rational traders to short … which provides fuel for the next round of short squeezes.

More perverse incentives that feed on themelves … until they don’t, anymore.