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As we contemplate an extraordinarily uncertain future, it’s interesting to reflect back a year. I certainly don’t remember anyone forecasting yet another year of double-digit mortgage Credit and home price gains. The consensus view had housing slowing rapidly, in the process forcing the U.S. consumer to retrench. Some saw the Fed wrapping things up last June at 3.25%; others expected that the Fed would be well into another easing cycle by now. With 10-year bond yields stubbornly below 4% this time last year, a view was taking shape that the global economy was beset by intransigent disinflationary forces. If inflation hadn’t made its appearance after a few years of ultra-loose global monetary policy, we were told, it just wasn’t likely to happen. Or so they thought.

As the dollar index approached a double-digit gain by mid-2005, a fanciful notion also took hold that the risks associated with dollar weakness had passed. The "Bretton Woods II" hypothesis became all the rage. It was going to remain mutually beneficial for U.S. consumers to consume and Asian producers to produce, while their tightfisted consumers and determined central bankers ensured at least several more years of Asia as steadfast buyer and price-setter for our Treasury and bond markets. It was similarly explained to us how there was too little global consumption and a glut of global savings, ensuring that U.S. and global bond yields would stay low (and even likely go lower). It is such a fascinating (Global Credit Bubble) environment where things can change radically in a year.

We haven’t of late heard much of the global disinflationary backdrop or the virtues of Bretton Woods II. Instead, there has been a reality check as inflationary pressures take center stage. Global bond yields have surged to multi-year highs; the dollar is sinking back toward multi-year lows; and commodities price indices are near record highs. Where did the sanguine inflation and rate analysis go wrong?

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