There is no doubt the "market" has been acting just fine...but corrections start because of investor's conditioned sense that nothing can go wrong. We have news for them, corrections do occur.

Global investors threw a record $262 billion at private-equity funds last year, small-cap stock indexes are at all-time highs, and colleague Scott Patterson recently reported that more than $20 billion has flowed into emerging-market stock funds so far this year, matching the total inflow for 2005 and roughly five times the amount of money pumped into emerging-market funds in 2004, according to the research firm Emerging Portfolio Fund Research.

Emerging markets, often the scene of post-Fed meltdowns, seem to be especially vulnerable to rising interest rates. A 2001 paper by Harvard economist Jeffrey Frankel and New York University's Stern School of Business economist Nouriel Roubini found that the J.P. Morgan Emerging Markets Bond Index falls by 34% for every one percentage-point increase in the average inflation-adjusted ("real") lending rate in the Group of Seven industrialized nations.

UBS analysts estimate that G7 real interest rates have risen two percentage points since April 2004. But instead of falling, the EMBI has gained nearly 21% during that time, according to J.P. Morgan, and the EMBI yields just two percentage points more than the 10-year U.S. Treasury note -- meaning investors think emerging-market debt is only slightly riskier than U.S. Treasury debt, compared with 10 percentage points in October 2002.

It seems something's got to give. "We are in a situation similar to that which existed in the spring of 1997, when threats existed to market stability and a lot of people didn't want to see it," Citigroup Vice Chairman William Rhodes, also Vice Chairman of the Institute of International Finance, told reporters at a development-bank meeting in Brazil this week. "I am not predicting a new Asia crisis, but it is interesting to see the similarities that are present."

"I think these are the kinds of little cracks in the glass you see before things really break wide open," says Michael Panzner, author of "The New Laws of the Stock Market Jungle." Mr. Panzner agrees with Warren Buffett that the next financial mess is most likely brewing somewhere in the derivatives market.

But the biggest victim of rising rates might be less exotic, and closer to home -- literally -- and we may be seeing the early stages of its decline. The average rate on a 30-year fixed mortgage rose last week to the highest since September 2003, and sales of new and preowned homes have been on the decline for months in the U.S., with the inventory of unsold homes rising.

And Fed policy usually does its maximum damage after a four-to-five-quarter lag, says Mr. Rosenberg of Merrill Lynch, meaning the worst for the housing market may be yet to come.

"I'm not trying to paint an Armageddon scenario," he says, "just to point out that these Fed cycles have this nasty tendency of exposing and covering and then purging the excesses of the day."