Oslo, Norway

As I flew into Oslo Friday afternoon from London I had a feeling July unemployment figures would be well received by the markets. And indeed the figure inspired a big rally in New York though stocks finished well below their highs for the day. Oil prices also declined on the session.

To be sure, the pace of job losses has begun to slow since June but still remains in dangerous territory with almost a half a million people out of work last month. The trend in jobs in headed downhill; I’m not so sure that’s a cause to celebrate, especially when companies are still trying to cut costs to the bone in an environment of poor demand.

Only big government is the source of demand everywhere in 2009 – including China. And that’s the focus of my discussion this morning.

It’s already conventional wisdom this year that China is rescuing the world economy as her voracious appetite for commodities rebounds after falling off a cliff in Q4. The country has spent about $586 billion since November on infrastructure spending pushing up the prices of raw materials through the roof since March.

Yet according to Horseman Capital in London, China’s demand for crude oil actually declined 2.9% over the first six months of the year. Isn’t that statistic surprising?

That makes me wonder if this entire post-March 9 rally isn’t one big illusion created by the press and global governments; if China is consuming less oil than how are we supposed to believe that a demand-driven recovery is underway when more than 50% of her export markets are not consuming. China can’t rely on domestic fiscal spending forever or her Asian neighbors.

Goldman Sachs, probably the most successful bank in the world, now pegs this a new bull market since March. Goldman is smart money. But like other forecasters in the past they’ve also been wrong. There’s no doubting the strength of market internals lately as Dow Theory has turned bullish since July 23 and the momentum of this recovery is almost nonstop with barely any profit-taking at all. Nothing has corrected meaningfully since March – not stocks (just 9% off their highs in July before recovering), not commodities and not credit.

If China’s demand for oil has declined over the first six months of the year then the world is putting blind faith in the great Chinese miracle. The Chinese sell to the world and don’t buy anything from abroad, except high quality machinery from the West. Aside from domestic infrastructure projects I’d love to know exactly who’s buying her cheap manufactured products. The Americans and Europeans are saving, not spending.

In many ways asset markets virtually everywhere are now in big “bubbles” again.

The Chinese stock market has doubled off its lows, credit spreads have crashed, inter-bank lending has resumed and mergers and other deals have sprung back to life lately. Yet I still find it hard to believe that we’re back to “normal” after the worst destruction of wealth in 75 years in 2008, a housing market with more than 12 months’ worth of supply and most of all, an environment marked by tight credit as banks refuse to lend or continue to hoard capital.

What’s cheap today is everything that worked last year. Volatility, Treasury bonds, the dollar, yen, and especially, betting against world stock markets and commodities. But who has the nerve?