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While it is impossible to quantify, I am convinced that the rampant financial sector expansion is distorting the true scope of the current Credit expansion. Clearly, the massive expansion of Financial Credit is boosting Income, gains on assets sales, foreign flows recycled back into the U.S. economy and confidence generally. As such, it today requires less – and perhaps significantly less – household, corporate and government debt growth to sustain the U.S. Bubble than would normally be the case.

It is my belief that the U.S. bond market is coming to recognize this dynamic. For some time, players have been monitoring housing market dynamics with the expectation that an abrupt slowdown in mortgage Credit growth would have dire consequences for the vulnerable U.S. economy and Credit system generally. Not only has unparalleled financial sector expansion created more than ample liquidity to sustain the boom, resulting income and securities markets gains have supported home prices and held a full-scale housing bust at bay.

Some analysts see rising global bond yields as evidence of waning liquidity. I believe that bond markets are instead finally wising up to the implications of chronic global liquidity excess and the likelihood that central banks still have an abundance of work ahead of them – perhaps even at the Federal Reserve. Considering the amount of leveraging in the system – especially in the U.S. where markets have been too well-positioned for the next easing cycle – it is now conceivable that a spike in rates could lead to some problematic de-leveraging and liquidity issues.

I don’t buy into the bulls’ fanciful imminent recovery from a "mid-cycle slowdown" thesis for a moment. I’m also not much of a fan of the prevailing bearish view that housing is well into the process of dragging the economy into recession. Rather, I see the economy in the process of bouncing back at the hands of precarious Credit Bubble excess – especially throughout the financial sector. Housing has been a meaningful setback, but the enterprising U.S. Credit system has found a way to sustain more than ample Credit and liquidity creation – not to mention speculation.

I’ve argued for too long that the U.S. Credit Bubble is acutely vulnerable to a spike in interest rates. With the booming U.S. financial sector and global financial and economic Bubbles as a backdrop, we might now be only a growth spurt and a negative inflation surprise from testing this thesis. Deleveraging and the unwinding of speculative positions – and the associated reversal of today’s key sources and flows of liquidity - would be especially debilitating for our unstable financial sector and economy. And that’s, as they say, The Other Side to the Story.

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