Throwing vast quantities of cash at the markets has certainly rescued banking systems from total meltdowns and created a new boom in stock markets, particularly those in emerging markets such as China, and in commodities.

However, it looks ever less likely that fundamental problems are being resolved and a new day of reckoning may be getting closer.

Asia may be especially vulnerable despite its overall economic strength because it has recovered faster than most. India's index has more than doubled since early March while Hong Kong, lead by its mainland components, is up 70 percent, even more than Shanghai up 50 percent since it began its climb back in January. Even the more mature northeast Asian economies suffering heavy exports falls have rebounded, Taiwan by 37 percent, Korea and Japan by 40 percent. Elsewhere, Russia and Brazil have led a commodity-driven bounce.

On the one hand, markets have been rising at the same time as US bond yields have also been rising sharply despite continued bond-buying by central banks in Europe and Japan as well as the US. This suggests either that markets fear the return of inflation and/or that a recovery in the real economy is now underway.

On the other, evidence for real recovery is spotty and yet the necessary correction in external imbalances – a fundamental cause of the crisis – may have already come to a halt. Indeed, while the flood of new money from governments and central banks may have stabilized banking systems it has also been behind the rebound in commodity prices – and even real estate prices in Hong Kong – as investors seek real assets as safe haven.

That rise in turn is causing trade imbalances to rebound and will cut into consumption. Wall Street, on a good news roll, cheered the latest US retail sales pick up – a rise of 0.5 percent in May. But almost all of that additional spending was attributable to high gasoline prices. And that was before oil prices were back over $70.

Lower energy prices – let's say $45-50 a barrel – are crucial if trade imbalances are to be brought down to sustainable levels and US households continue to increase their savings without crushing demand for other goods and services.

So far it seems that US consumers have been wising up. Household savings is back to 5 percent of income despite rising unemployment. That is all to the good. But despite this the US trade imbalance is still running at near $30 billion a month. That is half its peak but still too much given the cost of debt service.

{mospagebreak}

The sustained weakness in western and Japanese consumer markets is continuing to show up in Chinese exports just at the time when some recovery should be expected. Month on month data is mostly getting better simply because inventories were cut to the bone in the late 2008 panic. But China's May exports were even lower than April and down 26 percent on a year ago.

The rebound in commodity prices has been real, to the extent that a rebound in bulk carrier shipping rates has also been evident. However, there are some indications that demand for raw materials has now overtaken recovery in usage with users taking advantage of low prices and shipping costs to build stockpiles.

Domestic demand everywhere is of course doing better than exports. China for one is boasting of a huge jump in fixed asset spending, from levels which were already very high. India, Indonesia and other populous emerging economies are also reporting resilient domestic demand.

However, even if these can be sustained in the face of continued sluggishness in exports, the issue of profitability also needs watching closely.

Hong Kong's rise has been entirely driven by a rush of excess liquidity into stocks and property even as the real economy languishes. The market is trading on 17 times historic earnings – earnings which seem more likely to fall than rise.

Indeed, every market is now factoring in a steep and early earnings rebound. Some of this may happen as there is still an overhang of capacity in many industries from cars to electronics to airlines. China's stimulus is being driven by massive increases in bank lending, mostly to state enterprises. This does not augur well for the profits of the borrowers, let alone the banks which at some point will have to absorb big increases in non-performing loans.

None of this is to suggest that the global market rally cannot go on for a while longer. Monetary stimulus is still the order of the day and commodity-driven emerging markets (and Australia) can continue to be buoyed by raw material prices. But asset price gains unrelated to real economy and profits improvements will ultimately prove temporary.

Some recent gains have been driven by those (like Temasek) who sold in a panic earlier in the year and are now desperate to get back into the markets. Some are driven by those who have been sitting on cash and thinking that a dividend yield of 2 percent – which should be within reach even if dividends fall by one third --is at least better than the 2 percent or less on 2-year government bonds.

Thus the market bounce is not driven by irrational enthusiasm but by the weight of money. But it does leave unanswered the question of where to invest should the outcome of all this be a repeat of the mid-1970s era of stagflation. Or a sudden market realization that the real economy's recovery will be a long and painful event and that once the central banks take away turn off the liquidity tap the world will still have a long way to adjusting those old imbalances and resuming a reasonable rate of growth.