Here's the million dollar question for traders: are we witnessing a period of volatility in stocks and commodities, or are we experiencing the incipient phases of the next decade's bull market. The financial media is more enthusiastic about the future of the markets than reason and knowledge would dictate, but even among seasoned traders there appears to be a belief that the Federal Reserve's massive interventions in economic activity will result in inflation which will cause assets of all kinds (including stocks and commodities) to appreciate, as the dollar loses more of its value with each passing day.



What are the reasons that justify the anticipation of inflation among traders? First there is the obvious issue of money supply. The Federal Reserve has been doing its utmost to expand the monetary base, printing vast quantities of money in the form of Treasury buybacks, through the various programs aimed at guaranteeing the flow of credit in the markets, through guarantees, and outright asset purchases.

The belief in emerging markets, Asian in particular, as the new driving engine of global growth is another pillar upon which the inflationary scenario is based. The suppressed appetite of Asian consumers for spending, and the vast stimulating action undertaken by some governments should ensure a rapid jolt to economic activity which will allow new and long-lasting dynamism, some argue.

Finally, analysts keep finding new technical reasons to justify the new era of soaring stock prices, in line with their unwilingness to predict anything other than bull markets since the dawn of financial timekeeping.

Should we really expect a sustained, multi-year, inflation-driven bull market under these circumstances, or should we regard this as the beginning of a much more volatile period for the financial markets, in comparison to the environment to which we have grown used to during the 2003-2007 period? A dispassionate study of the facts would justify the latter.

The value of the dollar, and the inflationary potential of economic activity in this country and the world ultimately depend on the ability of financial actors to leverage themselves, in the absence of major productivity enhancing technologies that can sustain and fuel growth. Given the culture-shifting events of the past two years, and the state of the financial industry, we believe that the next phase of the credit cycle will continue to be driven by deleveraging, not the opposite. Vast numbers of new unemployed workers is a phenomenon that is to be encountered in all parts of the world.

As these people run out of choices, pensions and savings, their return to the labor market will ensure that wage rises are kept at modest levels for a long time to come. Similarly, the significant investments in commodity enterprises over the years, justified by the irrational expectation of ever higher prices, should ensure that commodity prices remain volatile but stagnant in the long term.

Finally, the beehive of speculation on the demise of the dollar as the global currency does not have that many concrete actions backing it, and in the absence of commitment and determination by the detractors of the present system, the dollar's value will be upheld for a while to come, although this does not exclude wide fluctuations.

And of course, to add on top of all the theoretical reasons, one must recall that there is no sign of the purported inflationary nightmare into which we are heading according to some commentators. Prices are stagnant at best, and the immediate threat is deflation. That the markets choose to buy a scenario built of hot air may appear extraordinarily strange, but for those who are used to the ways of finance, there should be no surprise.

We believe that the best that can be said at this stage is that the future of the economy is bleak, which is reflected by the chaotic and unpredictable reactions and confusing opinions in the markets themselves.