Without a picture, and sans the definition of watering 'normally', I think it safe to assume it's just common mold/fungi. It's nothing to be concerned about. Is the mulch a wood product? If so, it's just breaking down naturally.

Watering too much can encourage that fungus to grow, and for the mulch to breakdown faster. Most fungi prefer moist, shady areas. Under 'normal' conditions, the fungi will grow when the area is moist, and will die back a little after the area dries. Sunlight will kill, or at least discourage its growth.

In any case, it shouldn't cause problems, just nature doing its thing.

Ditto

Check out this discussion. Could be the same thing http://forums2.gardenweb.com/discussions/1600002/white-grey-powder-in-hot-compost-pile?n=9

Yep, rgreen is exactly right.....it's fungal growth, the kind of fungi that decomposes the mulch. Keep the mulch stirred up, aerated, even replaced every once in awhile. The fungi aren't harmful in and of themselves but those slick mycelium and hyphae can form a hydrophobic mass.

Fungus is what turns wood into earthy humus over a period of years. Moisture and mild temperatures make that breakdown happen faster. So what you are seeing is just the natural circle of soil life.