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Thus far, dollar weakness and sinking market yields have been constructive for the global equities and commodities booms. There is thus far no indication that market developments are impinging the global M&A boom. Non-dollar assets – from gold and the metals, to energy, to foreign companies and resources – are being revalued higher. And, importantly, this circumstance is quite constructive for Credit growth and speculative excess from a almighty global financial infrastructure that has now had almost five years to get positioned to play this "trade" for all its worth.

And at risk this evening of sounding hopelessly out of touch, I am not ready to jettison the heightened inflation scenario. If this proves yet another case of the ballooning Financial Sphere dictating the Economic Sphere, the current market dislocation and yield collapse could be setting the stage for a 2007 inflation surprise. On a global basis, the faltering dollar will pressure foreign central bankers to tolerate loose financial conditions, while leaving domestic Credit system free to expand at will. A weaker dollar will make it only more difficult for the Chinese to manage their unwieldy Credit and economic booms. Here at home, we surely haven’t seen the last of energy and import price inflation. The booming export sector will be further stimulated.

But I’ll have to label the Corporate Finance Bubble as The Big Wildcard. Considering the liquidity and speculative backdrop, I’d be willing to bet that sinking market yields foster some extraordinary (inflationary) consequences. And it is my view that heightened compensation pressures are today a major Inflationary Bias, nurtured through years of Credit and liquidity excess. Barring financial crisis or some development that restrains Credit expansion or incites de-leveraging, the combination of ballooning corporate liquidity and the worsening skilled labor shortage would appear poised to manifest in continued Income Inflation. All bets are off, however, when the marketplace turns against the Corporate ("Credit arbitrage") Trade. For now, I’m going to force myself to see it before I believe it. Wall Street and the global leveraged speculating community have become incredibly powerful. I don’t expect they’ll be willing to let go of this pot of gold without a hell of a fight.

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