At this point, the weight of the evidence requires giving the benefit of the doubt to global reflationary/Bubble forces.  Global Credit systems remain fragile and vulnerable.  Overheated global risk markets are susceptible to any number of potential developments.  Yet, exactly these acute fragilities appear poised to keep the Federal Reserve, the European Central Bank, the People’s Bank of China, the Bank of Japan and other central banks locked in ultra-loose policies - for way too long.  The world is awash in cheap liquidity.  Meanwhile, various robust inflationary forces flourish.  I don’t have great confidence that market forces will rise to the occasion to discipline speculation or stem other inflationary biases.   

The Asia-led global recovery has gained sufficient momentum to benefit from an ongoing loose global financial backdrop.  Global bond yields have begun to adjust to this dynamic.  And it is certainly possible that nervous bond markets could at some point place considerable pressure upon timid central bankers across the globe.  As for the dollar, I am of the view that global reflationary forces are not as susceptible to dollar strength as others suggest.  “Emerging” economy Credit systems came out of the global crisis in relatively decent shape.  This dynamic coupled with today’s ultra-loose finance has created a backdrop conducive to unwieldy expansion.  I’ve expected this dynamic to prove resilient and nothing of late has led me to tinker with this view.  

I would expect the dynamic of inflationary biases creating self-reinforcing global financial flows from the “Core” (U.S.) to the Periphery (especially China, India, Asia and Brazil) to continue to weigh on dollar recovery.  Of course, markets are all about greed and fear and prevalent dollar bearishness will on occasion foster bear market rallies.  I believe synchronized global monetary and fiscal stimulus – along with especially energized “Periphery” Credit expansions – are major factors underpinning gold, precious metals, energy, and commodities prices.  Here at home, highly speculative stock and bond markets are vulnerable to a host of risks.  Yet, as over-liquefied markets persevere through adversity they tend to become increasingly emboldened – and only more speculative.  There are definitely Bubble dynamics at work in U.S. risk asset markets.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.