BIG PICTURE - The world's economy is muddling through and the majority of nations in the developed world are struggling. Furthermore, unemployment in the West is staying stubbornly high and sovereign debt levels are soaring! Thus, the macro-economic environment is currently unfavourable and unsurprisingly, the investing public is struggling to come to terms with the ongoing uptrend on Wall Street. After all, with so much bad news out there, how can stocks continue to rally?

The truth is that when it comes to investing, monetary policy trumps economic reality and the risk free rate of return determines the prices of all assets. In fact, history has shown that as long as central banks stay in 'easing mode', the economy continues to expand; thereby underpinning the stock market. On the contrary, after a period of monetary tightening, the economy tends to contract and a recession usually coincides with a big downtrend in the stock market.

In case you are sceptical, Figure 1 confirms that every single economic recession in the US (pink shaded areas on the chart) since 1955 was preceded by a significant increase in the Federal Funds Rate. Put another way, none of the previous economic recessions occurred without a significant increase in the Federal Funds Rate.

David Fuller's view I agree with these opening comments, as subscribers may recall.

However, I would be surprised if the Federal Funds Rate remains "unchanged for another 3 years", as forecast at the top of page 3. Pressure to moderate this policy is gradually increasing within the Fed. Moreover, Mr Bernanke may decide that he has completed his deflation-defeating challenge within that period, and moved back to university life, probably at Princeton from whence he came.

For this reason, I would use the current decline (historic monthly & 10-year weekly)in low-yielding long-dated government bond markets as an opportunity to lighten positions, since the medium to longer-term risks considerably outweigh additional rewards, in my opinion. Even a small increase in global GDP growth and hints of less accommodative monetary policy could lift long-dated yields sharply. A simple but obvious point: 31-year plus bull markets are long in the tooth by definition.

Lastly, with US GDP growth gradually improving, and with most Asian economies growing faster that the USA, I think the Continuous Commodity Index, best seen on a longer-term chart, could be stronger than Peru Saxena is currently forecasting. While the highs are still declining, I maintain that last year's drop to nearly 500 was climactic and a break in the orderly, ranging decline since the rally back to 600 would signal a somewhat firmer phase.