The Fundamental Rally – theory
Economy 
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What does economic recovery mean and how is it different from mere “stabilization”? It is the equivalent of the patient on the one hand getting back his/her vital signs but still remaining essentially horizontal, and on the other hand wandering around the ward. There is a clear difference! In economic terms, recovery means real economic indicators such as retail sales, industrial output and imports are no longer contracting, but actually rising. In particular, as imports start rising, first on a year-on-year basis due to basing effects and then on a month-on-month basis, this is the first real sign of fundamental recovery. At street level, more practically, the first sign of recovery is people back in the shops and retail prices making a bottom.
During Phases III and IV, prices fall until such time as consumers are tempted back by bargain basement prices. Phase V is when that temptation produces results. The elimination of corporate de-stocking which had hitherto been a drag on growth, coupled with lower interest rates and looser fiscal policy which provide support for weak domestic demand, help boost economic growth. Corporate re-stocking of inventories gives a further lift to that growth take off. In terms of the trade balance, inventory re-stocking accelerates the recovery in imports, in turn accelerating the pullback in monthly recorded trade surpluses. However, by this time, capital flows have begun to offset and then exceed trade flows as investment returns to the region. Rising real economic indicators attract rising capital inflows, helping once again to produce a rally in the local currency. However, unlike in Phase III, this time the rally is fundamentally- based rather than just liquidity-based.
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