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I still get stomach aches from all the humble pie I’ve consumed from my predictions of an imminent bursting of the mighty bond market Bubble. Everything I thought I understood about market Bubbles, financial history, and the unprecedented degree of leveraged speculation that had come to permeate the U.S. Credit system left me cocksure that the bond bear would be one elongated and ferocious grizzly. Well, wrong and more wrong (at least so far). Contemplating my analytical errors, I now appreciate that I failed to adequately take into account the global Credit and Liquidity backdrop. U.S. and Global Financial Conditions were extraordinarily loose, which (so clearly in hindsight) ensured that abundant liquidity flowed continuously into U.S. Treasury, agency, and debt markets (recycling massive U.S. Current Account Deficits, as well as enormous "carry trade" flows from Japan, Switzerland and elsewhere). The global liquidity backdrop has proved itself overpowering.

Clearly, housing Bubbles demonstrate different dynamics than a bond market Bubble. For one, there are prominent local characteristics creating varying degrees of housing vulnerability. One can today examine Florida and California, for instance, and see markets acutely susceptible to bursting Bubble dynamics. These local factors (expanding inventories and inflated prices, along with mounting post-Bubble speculator revulsion) will now – even in the face of a resilient National Mortgage Finance Bubble – play a more pronounced role in dictating market dynamics than declines in mortgage rates.

At the same time, as analysts, we should not dismiss the possibility that the generally loose U.S. and global backdrops will continue to present a countervailing force supporting home prices around the country, similar to how they’ve cushioned the bond market Bubble. It sure doesn’t hurt that lenders are "printing money" outside the mortgage business, while the enterprising leveraged speculator community is finding myriad creative ways to profit from this incredible late-stage Credit boom. With Global Credit conditions underpinning employment and income - while stoking systemwide liquidity over-abundance – I’ll continue to approach the unfolding housing bust with analytical caution. The housing grizzly goes on a rampage with the breakdown of the Mortgage Finance and Credit Bubbles. In the meantime, I am willing to predict escalating Monetary Disorder and resulting wild marketplace instability and divergences in housing, securities, and commodities prices – a backdrop poised to confound the Fed and limit their flexibility for responding to deepening housing troubles.

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