It is worth noting that the Mortgage Bankers Association weekly application index is near the highest level since the summer of 2003. Of course, this boom is being driven by refinancings – which are now running about triple the year ago level. Mortgage rates are these days at historic lows. There are indications that Credit conditions are loosening meaningfully, with even jumbo mortgage rates dropping. As a disciplined analyst, I cannot disregard indicators that have many times in the past proven their worth.

The unfolding refi boom has the potential to significantly impact systemic reflation. For one, millions of households will be reducing their monthly mortgage payments. Many with adjustable-rate, shorter-term, or various "exotic" mortgages now have an opportunity to stretch things out to 30 years at quite favorable rates. While certainly a fraction of previous inflated levels, there will be meaningful equity extraction used to pay down higher cost debt and, perhaps even, buy things (weekly retail sales trends have stabilized). There is also the dynamic where holders of millions of old mortgages will receive early repayment in a process that works to reliquefy segments of the MBS marketplace. And I’ll assume that the GSE’s will increase their holdings of new MBS, perhaps creating a significant impetus for system reflation. At the minimum, Fannie, Freddie, and the FHA will be stamping their (I mean the taxpayers’) guarantee on hundreds of billions of MBS, creating more "money-like" debt instruments out of Wall Street’s previous "private-label" variety of (discredited) mortgage securities.

It’s my view that the markets generally lead the economy – not vice-versa. If this stock market rally is sustained, I would expect the summer home selling season to surprise on the upside in many locations. When some semblance of confidence returns to housing markets, I would not be surprised to see some pent up demand positively impact auto sales. Anecdotally, it appears consumer Credit conditions are beginning to loosen – even in auto finance.

If we step back and ponder the unprecedented scope of today’s global fiscal and monetary stimulus, we shouldn’t be all that surprised by the fledgling reflationary forces observable both at home and abroad. I have labeled emerging dynamics the "Government Finance Bubble." There is mounting evidence that this Bubble is developing critical mass and should be taken seriously.

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