The bond market started to give a message this week that strong economic growth is being hurt by high oil prices, so I feel we have come to the point of no return. The issue now is, will central bankers stop being so hawkish on inflation, and just allow market forces to assume control for a while.

That is not an advocacy on my part; just a question.

I think the capital market is now at a turning point because if short rates cease to rise (from the pressure of central banker policies), I feel that the huge price increases in real estate prices can (will?) be locked in and that the (inflation-beneficiary) phenomenon in real estate would then transfer to the equity market.

Without committing to a forecast on what policy change the U.S. Fed might make here, I think the market will tell us before we figure it out.

Why? That's because "The New Fed" will be the fiefdom of the individual whom President Bush installs to replace the retiring Alan Greenspan. So just like the policies of "The New SEC" are going to change because of the intentions of Chris Cox, which were known in advance and accepted (which is to say desired) by the President, so too will the Fed be constructed.

Therefore the message in the form of the choice for the next Fed chairman will be the primary signal for future direction of the capital markets. If there is to be a hawk on inflation like Greenspan, then the amplitude of future stock and bond market cycles will remain fairly narrow. But, if the new chairperson is not going to be so restrictive in policy with respect to inflation, then the marketplace will react accordingly, i.e., more extreme trading cycles.

After we know who is selected to become the next Fed Head, I say that whether the U.S. Congress plans to continue its costly War on Terrorism, or not, would then become the key factor that takes control of the market. For instance, higher levels of inflation will follow continued high levels of spending, budget deficits and government debt, and traders should not expect otherwise.

Given the present make-up of Congress, where I see no major change to policies in place today, but where I do see upcoming reflation policies of the Fed (along with higher interest rates), I happen to believe that the amplitude in price cycles of stocks and bonds will become increasingly exaggerated.

In my view, prices for most equities will rise for a while " like the latter 1990s " and then they will fall " like 2000 through 2002, or possibly worse.

I wrote about this situation a week ago as I started to get a sense that the housing bubble might take some time to pop, and that perhaps we all should not be so focused on it.

There is so much cash about, caused by the increase in personal and government debt, not just in America but also abroad in economies like China, that the extent of inflation in capital markets in future years will depend on how that cash is used.

If cash is used to chase the price of certain goods, with real estate being one example in the past couple years " diamonds and gold could be another in the next couple " then value (i.e., wealth) is not being created, and inflation will become a serious problem, like it was in the 1970s after Vietnam.

But if that cash is put to work building economic infrastructure, like massive new power generation plants, or the building of new cities and rebuilding of old ones, at prices the lower and middle class can afford, then equity markets will boom.

I see that happening today in the real estate market. If investors are buying homes to obtain cash returns of two or three pct, then the boom will continue. Developers will exploit that opportunity.

But the point at which real estate investors decide en masse that they are not going to wait for inflation to drive up prices, and they choose to reinvest their capital in wealth creating ventures, with higher cash on cash returns, then the cycle of rising house prices will end. Like I say; that doesn't necessarily mean a popping of the bubble. It could just be that the real estate phenomenon is transferred to equities, which would lead to the bond market being a victim until the economy starts growing full-time jobs in North America and Europe.

So, that is the state of the market this summer, as I see it.

Have a good day.