Chicago (en route to Phoenix)

Earlier last month I made the case for buying assets that have been depressed over the last several months and beyond since the market hit a low on March 9, 2009. I still believe that low was not "the low" but an intermittent low in the confines of a secular bear market that began in October 2007.

I remain bearish on most markets because I think we're truly living in an extraordinary environment since late 2008. Most investors don't appreciate the extent and damage caused by the credit crisis. Its lingering shadow will remain with us for a long time as the threat of deflation is finally overcome by inflation, courtesy of the Fed.

A cocktail of government intervention, bailouts, mortgage intermediation on life-support and the long-term challenges facing sovereign government financing all portend to heightened volatility in 2010 and in 2011. The credit crisis has now spread from the private sector to the public sector. Government bond issuance is set to hit another record in 2010, dwarfing corporate bond new issues.

Among the best speculations remains the VIX, or the CBOE Volatility Index (see above chart). This options-based risk gauge of the S&P 500 Index continues to hover near an 18-month low and trades just above its 52-week low. The VIX recorded a 40% gain the second half of January as China's tightening and fears of a Greek default smashed world markets. It has since plunged again.

The best time to buy portfolio insurance is exactly when nobody wants it. I doubt we'll see a VIX at 80 any time soon but it's a fair bet that VIX can touch 35 or 40 from current levels on another macroeconomic dislocation – an event far more threatening than the prospect of a Greek default.

I'm not sure what Black Swan looms out there but it would be rather naïve to believe we won't see another severe correction or bear market again any time soon, especially as the Fed tests the markets with a rate hike later this year. The odds are growing that the Fed will bungle monetary policy over the next 12 months and trigger a severe market sell-off, not unlike 1936, when the nation's post-depression economic recovery was abruptly cut short by a hasty central bank.