Well, Ben Bernanke appears to be winning over the gloom-and-doom crowd, at least today.  What an impressive rally. I was surfing some data trying to rationalize it, and I have noticed some interesting changes going on in the market. The clue may be in the money supply.

If you look at recent charts of the money supply as put together by the dark, yet excellent analysis of government statistics over on Shadowstats.com, John Williams's site, you can see something that is truly intriguing: an uptick in the money supply growth rates.

Source: Shadowstats.com

What's really important is the "M3" line, which includes the monetary aggregates as well as a calculation of bank credit. This uptick is not to be taken lightly, as it would represent a "regime change" in aggregate money supply, whose growth rate has been shrinking since the 2008 financial crisis. M1 was able to grow after the financial credit through the injection of stimulus and actions by the Federal Reserve. But they were only "filling in the hole" left by the the decline in the heavy blue line, because of deleveraging of the financial markets. This is the "fight the Japanese-stlye deflation" thesis of the central planners.

Is it possible that all of that is on the cusp of change? John Williams believes that a reversal in the money supply will trigger hyperinflation as quickly as the next 6 months. Then again, he's been saying that for two years. I think that's a tough call. We may just get mild inflation first, given all the overcapacity in the economy. And that's what former Federal Reserve head Paul Volcker said yesterday.

But there is certainly the danger -- or the opportunity, depending on how you look at things -- that things could change quickly. Only a slight uptick in bank credit would have huge consequences for money supply, given the stimulus already in place. Now, this could be pivotal for the markets, and it might help to explain the recent surge in commodities, including precious metals, as well as equities. More money is flowing into inflation-sensitive instruments. Is this money being put to work in the fear that the inflation picture is changing and that you now need to put money in assets that will benefit from inflation?

 A little inflation is nice, but you have to ask yourself, whith unprecedented monetary stimulus, how much is good? Too much inflation is a confiscator of wealth, so let's all be careful. If you think about all the money locked up in cash, treasury bonds, and bank reserves, just a slight turn up in the money supply could unleash a serious inflation genie out of the bottle.

As for stocks? Well, they would look great, at first, even though in inflation-adjusted terms they have been losing ground to the precious metals for a decade now. This is the "stagflation scenario." The question is if Uncle Ben has miscalculated, and too much money is unleased, thereby creating an inflation storm and a consequential surge in treasury yields -- which would stop the economy in its tracks. But hey, with yields at 2.6%, I'm getting ahead of myself, yeah?

Where do I stand? Not so sure, at the moment. Clearly I've been wrong about the market topping this week. Got stopped out of my pilot short in the S&P, that's for sure. Hey, you can't be right every day. But I think commodities will be an important part of the picture and at least we're still long gold. The next great trade -- which everybody has been talking about for years but which in fact has been nothing but a terrible trade -- will be to sell treasury bonds. I think you do that when the move up in money supply and inflation is confirmed.

If I had real stones what I'd do is run out and lock in as much money as possible at 3% and start laying down inflation bets in a calculated, methodical way. You know, layer in, over time: More gold, oil, short treasuries, e.t.c.  Keep your eye on the money supply charts. They hold the keys to the kingdom.

(Disclosure: Long gold, silver, and some equities. Thinking about buying more, and potentially shorting treasury bonds.)