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Last week, the experts were sure that, “The recovery is finally here”. This week, not so much.

The optimists pointed to manufacturing, retail sales and employment as signs of a strengthening economy, but what they were really jazzed about were the moves in the bond market where yields on 10-year Treasuries inched higher for 9 days straight. Market-watchers saw that as proof that investors were ditching their risk-free assets (bonds) and moving back into stocks. (which is a sign of confidence) As it turns out, the Pollyannas were too quick to judge.

As of Friday morning, all the major indices were down finishing a 5-day rout that pushed the Dow to within spitting-range of 13,000. News of a slowdown in China, a recession in the eurozone, and deepening deflation in Japan have all weighed heavily on stocks and, once again, raised the prospect of another round of easing by the Fed.

The economy is nowhere near a “self sustaining” recovery. Surging stock prices are not a sign of a stronger economy, but poor monetary policy. In the last 3 years, the Fed has pumped $2.3 trillion in liquidity into the financial system. As a result, stocks have skyrocketed (The Dow Jones and S&P 500 have doubled in that same time period) while the real economy has remained flat on its back. The correlation is obvious.

The real economy is in the tank because households and consumers are still repairing from the housing bust and financial crisis which wiped out much of their home equity and retirement savings. Working people will remain

constrained in their spending until they’re able to whittle their debtload down to a more manageable level. That could take years.

So, it’s not surprising that retail investors have shrugged off the “recovery” hype and avoided the stock market altogether. According to the ICI, Mom and Pop are not just sitting on the sidelines, they’re actually withdrawing their money from equities and sticking into FDIC-insured bank accounts. Here’s a blurb from The Big Picture which explains:

“In the latest week, ICI reported that domestic equity retail funds saw another $2.9 billion outflow, the 4th consecutive in a row, and the 23 of out 27 outflows during the entire parabolic blow off top phase the market has undergone since October… What does this mean? (It means that) the dumb money either doesn’t have the cash to burn, or just doesn’t want to participate in a rigged, corrupt, centrally-planned market. Whatever the case, the Primary Dealers and the Fed will just have to keep hoping more central banks pull a Bank of Israel and sell the hot grenade axes to them, since Joe Sixpack is done being the “dumb money.” (“The Public Is Still Not Buying Equity Mutual Funds”, The Big Picture)

So, Joe Sixpack–who’s been reduced to a daily 32 oz. fortified Malt Liquor– has not been lured back into the Wall Street sharkpool by promises of easy money and early retirement. He has no interest in getting fleeced for a third time in less than a decade. He’s decided sit this one out.

But if retail investors haven’t gotten back into equities, and corporate earnings have hit a wall, then why have stock prices continued to climb higher? It can’t all be Bernanke’s funny money, can it?

No, there’s more to this than just the Fed. Bernanke’s had plenty of help from corporate bosses juicing share prices via stock buybacks. Trim Tabs Charles Biderman gives a rundown of what’s going on in a recent post on his blogsite:

“To repeat, the only source of new money with which to buy stock is coming from companies buying back many more shares then they are selling. However, that could be changing. While companies are continuing to buyback shares… there are some reasons to worry about that trend. First of all insider selling is surging. The rate of insider selling to buying went from a 5 to 1 ratio in January to a 14 to 1 ratio of insider selling to buying in February to 35 to 1 starting the second week of March. Similar, there have been none, zero, new cash takeovers announced so far this month compared to monthly rate of $15 billion last year, and the pipeline of companies wanting to sell new shares is ramping up big time. To me that says that while lots of buybacks are still happening now, that trend could be ending sometime soon, particularly now that Operation Twist is approaching its end.” (“Rising Stock Prices & Investors Believing in Miracles”, Trim Tabs)

So, what’s really fueling the rally is not “new money” (aka–Mom and Pop) or confidence in the so called recovery. It’s just lots of liquidity chasing assets and pumping up prices in the process. The place to look for a real recovery is incomes, employment and credit. If incomes aren’t keeping pace with production–and they’re not–then more and more of the wealth is going to a smaller and smaller group of people. And, that means less consumption, less activity, higher unemployment, slower growth, and more social unrest.

And, if fewer and fewer people are working, then demand is going to be weak and businesses will have no reason to hire more workers, which means that spending will slip and the economy will stay in the doldrums.

And if consumer credit is only expanding in areas where lenders are issuing loans to people who are poor credit risks and likely to default (student loans, subprime auto loans, 3.5%-down FHA mortgages) then we’re not talking about real “organic” growth at all, are we? We’re talking about inflating another credit bubble that will eventually lead to disaster.

Now master illusionist Ben Bernanke has impressed everyone with his ability to keep the balls in the air longer than anyone had thought possible, but for how much longer? How long can stock prices remain disconnected from reality; that’s the question? This week alone the data showed the economy was losing ground on consumer spending, manufacturing, personal income, net trade, and existing home sales. Add those to the troubles in the EZ, Japan and China and 2012 and things are looking nearly as bad as 2008. Maybe Bernanke can surpass these grim factoids with more smoke and mirrors and his ponzi-printing press.

But, then again, maybe not.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at fergiewhitney@msn.com.