Currently, sentiment figures are at peak levels, not trough levels. For example, stock market optimism is at 87%, gold at 90% bulls, silver at 95% bulls, cotton at 97% bulls, and sugar at 98% bulls. And, of course, the poor dollar, which everyone continues to hate, is at 5% bulls. That is probably a good reason to buy the dollar, because everyone has probably already sold it.
The reason for such high bullish sentiment numbers, with the exception of the $, can be summed up with by the acronym QE2. Wall Street believes that as long as QE2 (Quantitative Easing Part 2) is a Fed option, the economy will boom and stocks along with all financial assets (gold, silver, real estate, commodities, etc.) will continue to motor much higher. But, there appears to be a problem. Why does the Fed need QE2, if QE1 did its job? The answer is because QE1 failed, and QE2 will likewise fail. It is as simple as that! Let me explain it this way. Since QE1 started in 2008, the Fed's balance sheet increased by $2.46 trillion, while during the same time horizon U.S. credit market debt declined by $296 billion. (Up until 2008, U.S. credit market debt rose for 63 consecutive years. That in itself should make an inflationist take notice.) All that QE1 expansion could not stem the tide of credit contraction, which is deflation.
Just look at the following chart of the various money measures, especially M3. A negative growth rate for M3 is due to credit market debt contraction. As long as the growth rate for M3 is negative, deflation, not inflation, is the name of the game. That is look for deflating financial assets, not inflating financial assets, going forward.
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