Where to now

There is once again heightened debate about inflation or deflation going forward.

Mind you this is not the first time. The deflation and inflation camp has been in debate for quite some time.

There is merit for both.

On one hand, the massive amount of debt accumulated in developed nation didn't reduce as a result of the financial crisis instead government filing up even more debt.

The effect of money printing is reflected in one of the best run of stock and commodity market in history in the short run. Now this cannot go on forever. This is an inflationary environment in the short term. However, the weak economy with high unemployment rate offsets the effect of quantitative easing.

In the long run, I favour deflationary pressure. The financial system remains toxic with unprecedented levels of debt in developed nations worldwide.

As Marc Faber suggested, the ultimate crisis is yet to arrive. Once it does, it will be mother of all crisis. The real crisis will clean up the system so that global economy can start all over again.

It sounds very scary. Unfortunately, it is not a joke and there is nothing funny about it.

As to where the market is likely to go, I think there is still room left for the upside however the margin is wearing extremely thin. Market sentiment is such that many participants are finding reason to be bearish a number of times yet nothing happened so far re-ignite this bearish concern. Every time, it fails to find sufficient reason to be bearish, the market rallies higher.

The weariness itself means the sentiment is not extremely bullish. However, market does not have to reach extreme bullishness in order to turn the corner.

One space to watch closely is the housing market in the U.S. and unemployment rate. We are at the very start of another wave of mortgage reset. Last time, reset in subprime mortgage market caused a devastating effect on the market.

Also US Dollar has been fairly bearish for quite some time. There appears to be support around 75 for the US dollar index. A snap back in US dollar will cause grief in the asset market like what we saw in 3 months period from Dec08 to Mar09.

It is not a bad time to take some money off the table. Rather be safe than having regrets.