Fear subsides, prices rise

As this chart shows, the Vix index has dropped to a new post-Greece-is-likely-to-default, and the-end-of-the-world-as-we-know-it-is-nigh low. Ostensibly, today's good news on housing starts is the trigger for the S&P 500's 3% advance. But the good news has been accumulating for awhile now (e.g., jobs growth, car sales, exports, inventories, bank lending, retail sales, capex, corporate profits), even as the stress in the Eurozone financial system approaches the extremes of late 2008.

Call it panic exhaustion: it's tough to continue to worry about the end of the world being right around the corner when the fundamentals continue to show improvement. And it's tough to worry that a Eurozone default will be a surprise or catch anyone off guard now that the world has had 20 months to prepare for it and markets have already marked down $1 trillion worth of sovereign debt. It's tough even to worry that a major sovereign default will bring down the global economy, since defaults are a zero-sum game that don't destroy demand. The bad thing about defaults is what led up to the defaults: all that deficit-financed spending that was squandered on transfer payments and faux-stimulus policies.

What's pushing the market up is the growing realization that despite all the concerns out there, the global economy is not hanging by a thread. On the margin, fears are declining. In part, that's because billions of people continue to go to work every day, and corporations continue to rake in record profits. It's also the case that, despite their best efforts to muck things up with "stimulus" policies that only work to restrain growth and increase uncertainty, governments and central banks are rapidly approaching the point where they can do no more harm. Keynesian stimulus policies have been almost completely discredited. Monetary policies have reached the "zero bound." Quantitative easing has been so massive already that adding a few more hundreds of billions to bank reserves can't possibly make any difference, except to further weaken currencies and boost destructive speculation. Meanwhile, the fundamentals that lead to real growth—the private sector's dynamism and willingness to work and invest—have been slowly and quietly improving behind the scenes, despite all the headwinds and roadblocks that governments have thrown in their way.