ONE reader wrote this morning to ask about this apparent contradiction between the gloom in the real economy and the exuberance being experienced in the stock market.

He wondered why there is a liquidity-driven rally, even though the US government has not implemented its programme to encourage private sector investors to buy the toxic assets from US banks.

“Since this theoretically means that the credit line is not easing yet, why is liquidity flooding back into the market ?” he asked.

Many other investors must be wondering as well.

There is a report this morning that the US government is putting the pilot sale of toxic assets on hold.

“Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system,” said Ms Sheila Bair, chairman of the Federal Deposit Insurance Corporation, the agency appointed to run the scheme.

Like some other stock market commentators, I still believe that this is a bear market rally – albeit a very powerful one.

What triggered the sharp spike in stock prices worldwide since March was the huge sum of money printed by the US Fed and other central banks to shore up the frail global financial system.

The same month, there was also the suspension of the “marked to market” rule which allow banks to essentially keep their toxic assets at values which might be well above what they might be worth on the open market.

It is interesting to record the cynicism expressed by veteran investors who had lived through previous bear cycles.

This was what Mr Jim Rogers had to say during a recent TV interview on the recent rally: “You give me 5 or 6 trillion dollars, I'll show you a very good time, there's no question about that."

But this still fails to solve the basic problems which have been afflicting the troubled US and European economies – too much debt and too much consumption.