Stocks Party Like It's 2009, but Soros Sees Ghosts of the '30s

From April 26 through June 7, the Dow fell 12.4% and the S&P dropped 13.7%, The Wall Street Journal reports, in a rapid-fire decline that scared many investors out of the market.

So, of course, stocks rallied at the end of last week and are starting Monday off with gains as the euro is rallying after France announced an austerity package and a report showed eurozone industrial output surged in April.

The "risk on" trade appears to be back in vogue for the moment -- commodities are also rallying early Monday, while "safe havens" such as the dollar, Treasuries and Japanese yen are in retreat. There's no telling how long this latest rally effort will last or how far it will take the major averages. But if the past 18 months are any indication, the move will probably go further and farther than most of us expect.

Still, long-term investors are understandably leery of trusting any rally, and there's plenty to worry about. Amid the "obvious" concerns about jobs, deficits, financial contagion and the like, legendary investor George Soros warned late last week "we have just entered Act II" of the crisis, declaring "the collapse of the financial system as we know it is real, and the crisis is far from over."

Act 2: Sovereign Debt Fears

While the banking system was stabilized by massive bailouts starting in 2008 and continuing today, the next phase of the crisis began when "the financial markets started losing confidence in the credibility of sovereign debt," Soros declared in a speech in Vienna. "Greece and the euro have taken center stage, but the effects are liable to be felt worldwide."

Moreover, "we find ourselves in a situation eerily reminiscent of the 1930s," Soros declared. "Keynes has taught us budget deficits are essential for counter-cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double-dip."

As noted above, the markets cheered France's austerity measure -- the latest of a series of such steps in the Europe -- but if economic growth comes to a halt, that embrace won't last long.

Whatever you think about Soros' politics, there's no arguing with his success in the financial markets: when George Soros speaks, it usually pays to listen.

Meanwhile, pundits such as John Tamny of RealClearMarkets.com and Charles Ortel of Newport Value Partners are seeing "eerie" similarities to the 1930s (if not current day Venezuela) in the U.S. government's assault on BP as the Deepwater Horizon disaster flows on. "The process playing out is most harmful to confidence that foreign investors used to have in the relative reliability and fairness of our legal process," Ortel writes.

If anti-business sentiment leads to slower growth and tit-for-tat tariffs and trade barriers, the past year-plus of recovery will be remembered as the eye of a horrific economic hurricane, not the end of the crisis