***Is it time to pile back into the market?

***The big danger looming beyond any recovery

From John Stepek, across the river from the City

Suddenly, green shoots are everywhere.

Stock markets seem unstoppable, brushing off all manner of bad news, from swine flu to threats of more fundraisings at US banks.

And more and more former bears are turning bullish. Crispin Odey, one of the hedge fund managers who made a mint betting against the banks before and during the credit crunch, has now made another mint by buying them. His £1.3bn Odey European fund returned 30% in April alone, according to The Telegraph, helped by a 1.5% stake in Barclays. “I think this is the start of a long bull market,” he says.

Is this the start of a bull market?

Crispin Odey is just another in an increasingly long line of respectable commentators to tell investors to fill their boots. Anthony Bolton also reiterated his conviction that we’re now in a bull market last week.

But while I’d like nothing more than to be able to tell readers to pile in, I’m not so sure. This rally has been impressive, but it may be getting a bit long in the tooth. According to Nick Godt on MarketWatch.com, the “smart money” is starting to think “it’s time to take money off the table.” Raymond James market strategist Jeffrey Saut says that “the ‘betting odds’ of making money in the short run have been greatly reduced after eight weeks into this upside skein.”

Meanwhile, Bill Gross at Pimco, who has backed the Federal Reserve’s money-pumping measures to the hilt, warns investors not to “be deceived by the euphoric sightings of ‘green shoots’… stable and secure income is still the order of the day.” Now, you might argue that he would say that, being head of the world’s biggest bond fund manager – stable and secure income is exactly what they aim to provide. But it’s hard to disagree with him.

Why people are feeling bullish

The fact is that the world economy crashed very hard in the wake of the credit crunch. In fact, few markets have fallen harder in their history. Global stock markets pretty much halved; world trade figures have been shocking; even the speed of the collapse in housing markets – which usually turn at pretty glacial rates, certainly compared to stock markets - has been faster than ever before.

When you fall that hard and fast, any sign that things aren’t falling as rapidly as they were has to look like good news. And the reality is that people get fed up of gloom and doom, which is entirely understandable. This is just a recession after all – it’s not the end of the world. And when people have been sheltering under their tin hats for months, expecting the worst, they feel all the more bullish when the worst fails to happen.

As we’ve mentioned here before, anyone who has so far avoided losing their job, has probably seen a good chunk of their living costs come down. And those people who do still have money are wondering where to put it. At an interest rate in the UK's pretty much zero, there’s not much to be gained from sticking it in the bank, it seems.

So once risk appetite starts to pick up, it’s no surprise that people might feel inclined to start piling into equities, or even test out theproperty market. And the more they feel that the threat from the recession has been over-exaggerated, the more risks they’ll feel able to take with their money.

So in some ways at least, as my colleague Dominic Frisby pointed out the other day the slash and burn approach of the world’s central banks is working. They’ve made it very unattractive to hold your money in risk-free assets.

Bear market rallies bankrupt people who still have money

Unfortunately, that also risks creating a massive trap for foolhardy investors. Having preserved their money after the first big crash, they are now being set up to lose it in the next one. That’s what bear market rallies do, as a participant at a recent RoundTable put it – they lure in the people who still have money, so they can bankrupt them as well.

The economy is still in deep trouble – rising job losses, falling house prices – all of that will continue for a long while. And with the banks still very much an unknown quantity, it seems highly unlikely to me that this is the end of the bear market.

But what if this really is that start of something bigger? The trouble is that if the world’s central banks really have succeeded in somehow short-circuiting the process of shaking out all the bad investments that were made during the boom times, then we’re just going to run into the same problems at some point in the near future.

At the moment, we are in a very unusual environment, in terms of interest rates and monetary policy. Interest rates at zero, money being printed and pumped into bond markets – to put it lightly, they’re not features of a healthy economy. So what happens when the Federal Reserve and the Bank of England start to pull away those props? The chances have to be that things will collapse again – or worse still, that the banks will act too slowly, and we’ll have double-digit inflation to contend with.