It seems obvious to us that we are approaching a tipping point. The rise in commodity prices and risk assets does not seem to be compatible. Neither does the rise in commodity prices, equity prices, and inflation expectations and overly easy central banks. The recent surge in certain currencies to two standard deviations above their purchasing parities should also have economic consequences. So the situation does not seem stable from a bottom-up perspective. And from a top down perspective, it seems obvious that the recent period of exceptionally easy fiscal policies should come to an end.

It has been a rough year so far in Asia, with unprecedented floods across Queensland, droughts in Sri Lanka, southern India and northern China, the Christchurch earthquake and now, most devastating of all, the Japanese earthquake and tsunami. Of course, there is already no doubt that in terms of human suffering and economic cost, this latest tragedy dwarfs all the others; at times like these, it is very hard to not feel either highly emotional, or completely despondent. As such, in an attempt to gain clarity, it is normal to fall back on history, and rely on it as a guide.

Bears have little to munch on right now: economic activity is bouncing back strongly, jobs are being created (albeit at a slow pace), global trade is soaring, the great majority of companies are reporting better than expected sales, and US profit margins are making new all-time highs. Given this plethora of good news, financial intermediaries are responding coherently and once again expanding their balance sheets.

Six months ago, many feared the US was experiencing a ?double dip? recession. And with core price measures already quite weak, there were renewed fears of a deflationary spiral. Inflationary expectations according to TIPS were falling fast. In response, the Fed stepped in aggressively, providing QE1.5 in early August, and then talking up QE2 in late August. Inflation expectations started to recover, and are now back to more normal levels?with five-year expectations back at about 2%, and l0 and 20 year expectations back to around 2.5%. And the TIPS market may indeed be right.

Bond yields are not rising because of rising inflationary pressures. Instead, bond yields are reacting to a stronger growth outlook. Leading up to mid-August, bond markets were pricing in a scenario of structurally sub-par growth and persistent resource slack. Amid super-easy money conditions, the joy over economic momentum might quickly morph into fear of a surge in velocity and inflation. But as we described, this does not seem to be the message from the bond markets today.

Why, in spite of record profitability and very strong cash flows, are U.S. firms not hiring more? One very simple explanation is the dramatic drop in the value of the assets of U.S. corporations. The net worth of U.S. non-farm, non-financial corporations stood at $16 trillion in 2Q07. By the last quarter of 2009, this net worth had dropped to $12.3 trillion. Now that the net-worth of U.S. corporations is expanding again, however, U.S. unemployment could improve rapidly given supportive fiscal and regulatory policy.

The weak dollar policy forces central banks everywhere to accumulate U.S. Treasury bonds. And with the U.S. registering yet another high current account deficit, one might expect foreign central banks to keep showing up on the 'ask' side of the market. Between the record low TIPS yields, the action of the 30-year bonds, and the overall market valuations, it seems that the bond market rally has come to an end.