Markets "testing the mettle"...

In previous posts, I referred to the current economic situation facing the average American...namely:

• the prospect of higher inflation to be brought about by a rise again in equity, oil and commodity prices because of the Fed's decision to hold interest rates low for the next two years, along with the potential for further monetary stimulus by various world governments
• the slowing in domestic and global economic growth
• the slowing in consumer spending
• the continued depression in house sales
• the continued acceleration of the national debt at enormous rates because of an imbalance in tax and GDP revenues versus government spending and debt repayment obligations
• the continued high unemployment rate
• continued cross-border red tape and trade protectionism
• concerns over Europe's fractured economic, financial, and fiscal policies

Add those to the uncertainty of a federal election facing Americans in 2012, along with a dysfunctional and unco-operative atmosphere surrounding any probable agreement on major bills facing the politicians between now and then, and we get quite an unappealing economic and social smorgasbord from which to pick our appetizers, main course, and dessert. This is the kind of table that Mr. Market has set out for all to peruse.

The market participants have gorged and purged since August 5th, alternating between fear and complacency, with large, volatile intraday swings and gaps...the gaps, most notably, have been around the August 8th level...traders seem to be concerned about the S&P downgrade of the U.S. credit rating that was issued on August 5th, along with the Fed's downgraded economic outlook for the U.S. on August 9th.

It may take more than just the emergence of a financial bail-out package being contemplated in Europe (or even in the U.S. at some future point) to set a proper table from which to feast without fear of the table cloth being violently yanked out from underneath, sending the food flying in the process. The markets, and the public in general, may wish to see a concerted, sincere effort, with decent results, from politicians which actually fix these problems...and soon. In the absence of such a scenario, I would consider any continued bounce in the markets to be undertaken on "borrowed time and highly leveraged money," carrying with it considerable downside risk.