In addition to being a senior contributor for CNBC, Ron Insana is a columnist for RealMoney. For a free trial, click here

.This story was originally published on

RealMoney

at 8:57 a.m. EDT on Monday, June 1.

Debate has been heated on Wall Street about the message the markets are sending in the wake of a massive three-month rally in stocks, a disturbing spike in interest rates last week, a 29% surge in crude oil, a related rally in other energy products (such as like natural gas) last month, a lustrous run-up in gold prices near their most recent highs and a disappointing 6% drop in the dollar in the last four weeks.

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Market mavens chalked up the moves to an incipient but potentially dangerous increase in inflation, or more accurately, inflation expectations. As you know from my recent postings, I believe

the 'flationistas have the story wrong, for a variety of reasons.

An economy simply doesn't move from the deepest deflation since the Great Depression to a Great Inflation reminiscent of the 1970s and early '80s without an intervening economic recovery.

And while the

Fed's

monetization (or financing) of our ballooning federal budget deficit is an overtly inflationary act, it is still only one of many preconditions for future inflation, and it assumes a full-blown economic recovery and a refusal of the Fed to unwind those stimulative measures at the appropriate time. However, at the moment it is in no way a guarantee of a general rise in the cost of goods and services.

I believe other forces have been at work in each market -- some to be expected, and some that some could be signaling unwelcome surprises.

The Greatest Bear-Market Bounce Since 1933

Let's start with stocks. Wall Street strung together a three-month rally for the first time since early 2007 that lifted the major averages more than 30% from their March 9 bear-market lows.

I am cautiously optimistic that the beastly March 9 low of 666 for the

S&P 500

is the secular low for this bear market. It remains possible, even plausible, though, that the gains are nothing more than a bear-market bounce, akin to the stunning 50% rally that stocks enjoyed in 1930.

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That unexpectedly strong rebound occurred after the 1929 crash, as the economy continued to head into the Great Depression and well before the ultimate low of 41 on the

Dow

was reached in July 1932. By the time the market had bottomed in earnest, the Dow had lost 89.9% of its value.

I don't believe that such is the case here. The composition of the market's recent rebound -- with leadership provided by financial, technology and commodity stocks -- is a solid sign that the domestic economy (and patches worldwide) is "reflating," but I'm not entirely convinced that we are out of the woods just yet.

Still, I would be a buyer of high-quality banks, insurers, homebuilders, multinationals, tech, media and telecom on any big pullbacks. The long-term prospects for the beaten-down shares of recession survivors are quite solid.

The Piglet in the Python

Much was made this week of an enormous move upward in interest rates, which was immediately and quite confidently interpreted as a sign that inflation is our next pressing economic problem. The notion of an immediate rise in inflation and inflation expectations was predicated on the massive stimulus coming from monetary and fiscal policies, the huge increases in annual budget deficits and the cumulative national debt, a depreciating dollar and the impact of higher commodity prices, as I stated earlier.

But that's plain hogwash for at least the next 18 to 24 months! With global capacity entirely underutilized (domestic factory usage rates are below 70% and well below the 85% utilization rates that signify production bottlenecks and pricing pressures in the manufacturing sector), with home prices still falling at near-record rates, automakers aggressively shuttering plants, and joblessness still rising, inflation is almost impossible in the near term.

Deflation

remains our most clear and present danger.

Even with the U.S. running record budget deficits and the dollar dropping, an inflationary spiral would need some other catalyst to gain any meaningful traction.

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What happened in the bond market last week was a massive case of indigestion. The government sold $101 billion worth of short- and long-term debt, on its way toward a record $2 trillion in new bond sales and a record $1.8 trillion deficit in fiscal 2009. The movement of all those Treasury bonds through the market pipeline looks like the proverbial "piglet in the python," creating a very visible bulge in the bond market that takes some time to adequately digest.

Hence, the bond market choked at mid-week on the new supply, sending 10-year Treasury yields to their highest levels in six months. (Oh, not a six-month high! Please recall that a scant six months ago, interest rates were considered historically low!)

Yields on the 10-year note moved up to nearly 3.75%, as demand for the Wednesday five-year note sale was deemed disappointing. The jump in longer-term rates widened the yield spread between two- and 10-year note yields to a record 276 basis points, implying imminent inflation to some and an inability to finance the deficit to others.

A steep yield curve implies an economic recovery is a virtual certainty six to nine months out, and that, with it, brings inflation.

From a budget perspective, weak demand for such a heavy offering of U.S. government debt implies that investors, both at home and abroad, want ever-greater yield protection from the rising indebtedness of the United States and the improbable (but rising) risk of default.

While Moody's, one of the big (but hardly credible) bond rating agencies, said the U.S. would maintain its triple-A credit rating, bond investors also were spooked last week by Standard & Poor's downgrade of the U.K.'s coveted triple-A rating, causing investors to worry that America's credit quality was about to be trashed substantially and immediately.

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Again, I disagree with the analysis. In purely mechanical terms, bond yields have historically jumped during Treasury "refunding" auctions, as they are called. Big commercial and investment banks, known as primary dealers, buy the Treasury bonds at wholesale prices from the government, and redistribute them to their institutional and retail clients, typically at prices above their cost basis.

While demand was soft for the five-year securities, threatening the dealers with large losses on their note purchases, investors snapped up the seven-year notes issued by the Treasury on Thursday. As a result, 10-year note rates plunged by over a quarter point immediately thereafter, comfortably back to where they were just a few days prior, but the collapse was barely mentioned in the financial press. Instead, the deficit talk continued, adding to worries that rising rates also would cut off inexpensive financing for housing, just as the market appeared to be stabilizing.

Some worried that the Federal Reserve, which has been buying both Treasury and mortgage bonds to keep mortgage rates down, was running out of ammunition to hold rates at historically low levels. But one good piece of news not mentioned was that Wall Street's primary dealers ended up making a killing on their bond transactions, buying them at marked-down prices and reselling them at a substantial profit, further aiding the recapitalization efforts of the nation's biggest banks.

Most important, with bond issuance now not an issue for some weeks to come, interest rates fell back, the yield curve flattened a bit and the implied future inflation rate, as measured by Treasury inflation-protected securities (TIPS), is now hardly an issue at all.

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Having said all that, the speed with which rates moved up

and

down last week may be more indicative of other, less obvious concerns that I will address as I discuss oil, gold and the dollar.

The May Day Parade

May was a banner month for commodities. Crude oil jumped by 29% to end at $66.21 a barrel. Gold surged to $980 an ounce, nearing its most recent high of just over 1,000 bucks, and the dollar dropped 6%, stoking gains in other commodities such as copper, aluminum and agricultural goods.

Part of the commodity story is good news. If the U.S. economy is poised to exit this Great Recession and the production of housing, autos and computers is about to accelerate, it should be reflected in the prices of the basic materials used to make all those things.

It appears China's economic stimulus program is increasing demand for raw materials there, helping to push commodity prices higher as well. Even unlikely winner Poland posted positive growth in the first quarter, one of only a handful of economies to do so, another early but positive sign.

Like stocks, though, it's also possible that commodity prices are in bear-market rallies of their own. While oil has about doubled from its March lows of about $42 a barrel and other commodities have done the same, oil still needs to rally about 110% to reach the all-time high of $147 set in the summer of last year. Oil exploration and production stocks, like

ExxonMobil

(XOM) - Get Report

(which I own), have moved up about 13% since March while oil rallied almost 60%, a negative technical divergence that bears watching and suggests that oil may not be moving on market fundamentals, but on other factors instead.

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Gold is taking its third stab in the last 10 months to meaningfully top $1,000 an ounce, rising nearly 13% in May, double the drop in the value of the dollar. (Gold and the U.S. dollar typically move in inverse lock step.)

All of this is a rather long-winded way of saying that while we're hearing plenty of explanations for the countertrend moves in stocks, interest rates, oil, gold and the dollar, I have serious doubts about that conventional wisdom.

Past as Prologue

The increasingly speedy upward trajectory of both oil and gold worries me,

not

because of the threat of imminent inflation, as I have repeated ad nauseam, but for reasons not quite so obvious and obligatory. Yes, it's true that oil, gold and other commodities are great hedges against rising prices and currency devaluation, but I believe we need to look a little deeper into the markets to understand what investors might truly be hedging themselves against.

I'm sure you have noticed that the geopolitical environment is far from perfect. In fact, it's probably deteriorating more rapidly than is being discussed in the general media. I am growing increasingly anxious about headlines that receive very little attention or talk time on TV and radio; they may prove to be far better explanations for the renewed volatility in markets than the conventional wisdom suggests:

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  • North Korea's underground nuclear weapons test, its second since 2006, rattled the markets for only one day before investor attention returned to more mundane subjects.
  • Russia recently raised security around its border with North Korea in the event of a nuclear "accident" on the Korean Peninsula. While North Korea has scant direct economic exposure to the rest of the world, South Korea, China and Russia all do. We should remember that China is a major oil consumer, Russia is, one of the top two oil producers in the world and South Korea has a vital export-led economy. A misguided missile attack, or even a failed nuclear missile attack by Kim Jong Il could be a part of the recent run-up in safe-haven investments like oil and gold.
  • Has anyone noticed that Israel's reinstalled prime minister, Benjamin Netanyahu, effectively blew off President Obama's request to halt Israeli settlements in the West Bank, potentially dooming an Israel/Palestine peace accord?
  • The Netanyahu rebuff doesn't make dealing with Iran any easier, as its rather bellicose president, Mahmoud Ahmadinejad, continues to expand Iran's nuclear capabilities and also continues to test-fire rockets capable of reaching as far as Europe.
  • The deepening battle between the Taliban and Pakistan has a potentially more worrisome nuclear dimension, possibly than all the other threats combined. Despite the calming words of a weakening Pakistani president, we really don't know whether a very sophisticated nuclear arsenal will wind up in the hands of the Taliban, or will remain "safe" in Islamabad.

These items, while making the mainstream news, appear to be somewhat underplayed and under-covered in both the general and financial news media. I don't mean this as a swipe to my colleagues in any way, shape or form. Like them, I am more preoccupied with the newness of the Obama administration, his domestic economic agenda and other pressing issues here at home.

But it is precisely at moments like these, when we are singularly focused on economics or domestic politics that the dangers of the world rear their ugly heads.

I think the "message of the markets" might be that we need to pay attention, right now, to more than just the obvious. We need to look behind the headlines. It's not just Main Street, Wall Street and Pennsylvania Avenue we need to be watching, but also the streets of unstable foreign capitals ... lest we be surprised, tragically, once again.

At the time of publication, Insana was long Exxon Mobil.

Ron Insana has returned to

CNBC

as a senior contributor to the nation's premier business news network. Prior to his return, Insana was a managing director at SAC Capital Advisers, a $12 billion hedge fund run by Steven A. Cohen. Insana was the president and CEO of Insana Capital Partners, a $120 million fund of funds manager, from March 2006 through August 2008. For over two decades, Insana has been a familiar face on business television, spending 17 years as a veteran anchor at

CNBC

. Before working at

CNBC

, he worked as managing editor and senior anchor for the

Financial News Network

, where he began his career in 1984 as a production assistant. He graduated with honors from California State University at Northridge.