Yesterday, at the Puerto del Sol, a group of demonstrators chanted; but none took up weapons. The whole day went by without a single political murder...by left or right.

What's happened to the Spaniards? Have they forgotten what happened in the thirties? With memories of the turbulent, bloody 20th century still fresh in their minds, how can they act so Zen-like...so cocksure of themselves?

But it's not just Spain. Everywhere, there is an unnatural calm.

Stock market volatility, which measures market jitters, is near all-time lows. Stocks themselves, as measured by the Dow, are at an all-time high. The U.S. government, the biggest debtor in world history, is still able to borrow money for more than ten years at less than 5% interest, even though consumer price inflation is currently near 3 percent. And foreigners still take U.S. paper dollars at par - China now has one trillion of them in reserve - even though the country runs a banana-republic-sized trade deficit - equal to 7% of GDP.

What's happened to the world?

Indeed, the Dow rose again yesterday. Gold is still in its correcting mode
- at $587. Oil seems to be wondering what to do next. We looked at the charts; the Dow is clearly in an uptrend, which, of course, could end at any moment. Oil and gold look as though they could do anything for a while longer.

It takes some time for a major trend to reveal itself. There is always a lot of back and forth, hemming and hawing, to-ing and fro-ing, giving and taking. The media is full of explanations as to why a trend is one way or another; but you never really know until long after. Then you look back, and it looks so obvious.

Along with setbacks, come second thoughts. You can't help but wonder if your theory is correct. You're tempted to chuck the whole thing and just go with the flow.

So let's review: Our theory was that the Dow began a major bear phase in January of 2000. 'Sell stocks, buy gold,' we said. But here we are, six years later, and the Dow is higher than it was, at least in nominal terms. Were we wrong?

Well, yes...and maybe not.

The Dow is higher; but the dollar is worth less, and gold is worth a lot more. In order to keep up with the dollar index, the Dow would have to be at 15,000 to be even with January 2000. In order to keep up with gold, the Dow would have to trade at 23,000.

What's more, a couple of analysts at the Fed just looked at inflation in a new way, which they consider to be a better reflection of actual price trends. What they found is that consumer price inflation is under-estimated by about 30%. Instead of 2% inflation, they say, the real level is about 3 percent. If so, it makes the Dow an even bigger loser in real terms.

What these figures are telling us is that the Dow is still in a downtrend, and that our theory may be correct after all. Yes, there is a flood of dollars in the world economy. And yes, many of those dollars are getting recycled back into U.S. stocks. But the fundamentals still don't look good for stocks...or the dollar, for that matter.

America's record trade deficits continue to be taken up by foreign central banks. For the moment, foreigners are still content to convert these trading profits into dollar-based assets. When they will get tired of doing so, we don't know. In the meantime, the greenback may be going up, but it is still a dangerous thing to hold.

This is true of stocks too. They may even continue to rise; but in our opinion, an investor buys them at his own peril.

For the moment, investors act as if the fundamentals don't count. No one seems concerned with the trade deficit; no one frets about the mountain of dollars in foreign hands; nor is anyone particularly worried about the downturn in housing; it's supposed to come in for a landing so soft there won't even be a ripple in the wine glasses of the first class compartment.

This may be so. Maybe it will turn out that investors are right to be so tranquil...so complacent...and so positive. But if we were you, dear reader, we'd buckle our seat belt, just in case.

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.