Reading Mr. Bernanke, the US dollar, interest rates and gold

He could then blame a recession, which would have come from the housing sector, on Mr. Greenspan. After that he could take some 'extraordinary monetary measures' in order to engineer an economic recovery for which he would take credit.

And should at that time inflationary pressures have failed to abate or even increased - as I would expect them to do - he could always argue that the Fed's policy priorities have temporary shifted to emphasize 'economic growth' over 'targeting inflation', and that the Fed would deal with inflation once the economy had fully recovered.

The stance of emphasizing 'economic growth' over 'inflation targeting' would at that time be also politically perfectly acceptable and welcome by the 'establishment', which would have taken advantage of a bear market in housing and hardship among sub-prime borrowers to acquire some assets at bargain prices.

China no help on inflation

Ben Bernanke recently gave a speech at Stanford in which he said that 'increased trade with China has reduced U.S. inflation, now running at about 2%, by only about 0.1 percentage point'. He also noted that while emerging economies have added to the global supply of manufactured goods, they are also adding to the demand for oil and other commodities.

And this is where I think the Goldilocks crowd, which argues for continuous economic growth, will be as wrong as it has been for the last few years. The super-bulls on the US simply overlooked the fact that strong economic growth in China, India, Vietnam, and other emerging regions of the world would lead to soaring commodity prices whose price gains significantly outstripped the performance of US financial asset prices.

But to put it very simply, I think that the Fed will not flood the system with liquidity right away, as its chairman only knows too well that he can do that at any time in the future, with whatever monetary injection it will take. I suppose it will then take a gigantic injection and that it will be very inflationary and produce no economic growth.

Decline likely

But for now I expect that relative monetary restraint by the Fed implies for financial markets to - at best -hold around the current level, but more likely to enter a more meaningful decline than we had at any time since the asset markets began to rally in March 2003.

There is some seasonal strength between the end of March and the end of April and, therefore, stock markets around the world may hold or even rebound modestly, but we would use rallies as selling opportunities. In particular we would avoid financials, housing related stocks, and retailers.

I still like gold and silver, although in the environment of 'relative tightening', I referred to above, price corrections in precious metals should not be excluded.