"Oil is in its final wave Supercycle degree in the bull market that began in 1933 when President Roosevelt seized America's gold and set the government free to monetize its debts and set the Fed free to facilitate the expansion of dollar-based credits through the banking system.

"The result has been a bull market in inflation, which the history of oil prices reflects. The chart over this whole period says that the price of oil and the inflation that propelled it are reaching a historic peak.

"The housing market decline has only just begun. People today are less able to afford a home at today's prices than they were in 2005 at 2005 prices. Homeowners, by the way, are still bullish. A CNBC poll recently found that no less than 90% of U.S. homeowners expect the value of their homes to rise or stay the same over the coming year. This confidence fits the case that more price decline lies ahead.

"Optimism has fueled the largest expansion in credit in history. Investors have used this credit to buy every investment. The recent collapse in the value of sub-prime mortgages and the jump in banks' overnight lending rate were the first hints that optimism is faltering.

"When it reverses fully toward pessimism, interest rates on all risky debts will soar. But rates on secure debt will fall, probably close to zero, because investors will want safety above all else.

"Falling interest rates in this environment will be bearish. Interest rates fell persistently through three of the greatest bear markets in history: 1929-32 in the Dow, 1990-2003 in the Japanese Nikkei, and 2000-2002 in the Nasdaq.

"The only comparably deep bear market in the past 80 years in which interest rates rose took place in the 1970s when the Value line index dropped 74%. Economists all draw upon this experience, but they ignore the others. Today's environment of extensive investment leverage and high debt in the banking system is far more like 1929 in the U.S. and 1989 in Japan than it is like the 1970s.

"Why is a decline in interest rates bearish in such an environment? Because it means a decline in the demand for credit. When people want less of something, the price goes down. The recent drop in rates indicates less borrowing, which means the primary prop under investment prices -- the expansion of credit -- is weakening. That's one reason why stock prices fell in 2000-20002 and why they are vulnerable now.

"Someday that optimism will melt as fast as it did in the mortgage market. There is no guarantee about timing, Any euphoric period that has persisted for nine years can continue to do so. The emperor has no clothes, but so far the stock market floats merrily unconcerned in a haze of unprecedented optimism."