Bottom Shekel / Walking on Thin Air

How quickly they forget, and how quickly the partying has started again. Who would have believed that less than a year after the collapse of Lehman Brothers - the event that has become the symbol of the entire financial crisis - the Tel Aviv Stock Exchange would return to where it was just before the collapse?

Provident and other savings funds have already recouped their entire losses. Corporate bond indexes, which suffered more from the credit crisis than did stocks, are even higher than they were before. So, if you invested in the bond market at the height of the crisis, you made a bundle: the TelBond-40 is up 54% since November 2008.

But what are the gains in bonds compared to shares? The Real Estate-15 is up over 120% since last November, and the Mid-Cap-120 climbed 140%. The banks have risen 155%, while a number of individual shares have even rocketed 300% and 400%.

Is that it? After 10 months the worst economic crisis is over? Probably not.

True, the paralysis and the fears of an insurmountable world financial collapse have passed, but it is also clear today that global economic growth will be much lower than in the past and 2010 will not be a particularly good year.

It seems stocks are being priced based on all of the most optimistic scenarios - mostly those of a global economic recovery. The problem is that not a single negative scenario has been taken into account.

Nevertheless, there are actually quite a few signs of good tidings: U.S. and European stocks are still well below where they were when the crisis started. Here in Israel, a weak and bloated government is charge, with a broken and bleeding Finance Ministry: a government without vision or plans leading anywhere. The private sector still has yet to start growing again, unemployment is rising, exports are falling, and small and medium businesses are suffering from a credit shortage.

So why have stocks risen so far and so fast? The answer is the market is feeding on itself. Mostly the money is coming from private individuals moving their savings from the banks to stocks and bonds. They are giving up on investments with near-zero yields and returning to where stocks are rising on a daily basis.

When will the stock market realize it is moving too fast? It is hard to know, and in the meantime it may even rise a bit more. But when the market realizes what is going on, it will hurt. Just like the cartoon character who finally looks down and sees he is walking on air.