FED WATCHING

A unanimous report from Dr. Ben & Cie today in Washington today that varied little from the March statement. There policy is to continue to create all the money in the world to buy all the bonds in the world with the slight modification being that they may not do it quite as quickly as they had previously indicated. The stock market liked that and held on to its gains of the day but closed well off the highs. The market anticipates cheap money with a permanent bid in the market. The Administration must have liked that because the short term effect is to keep interest rates low (the whisper target is 3.00% for the 10 year note), which helps mortgages, credit cards (after they beat the crap out of the card companies), and the stock market. Bankers like it because their effective cost is a shade up from zero, and the media likes it because it is desperate to report a win for the administration.

Perhaps you ascertain a lack of enthusiasm in my reporting...good call. A scenario that troubles me: In theory I suppose, the Fed can never run out of money. My problem is two-fold. Politicians have begun to realize this and the natural reaction of any politician in finding an unlimited supply of money will be to spend it. The projected deficit for this fiscal year is 2 TRILLION dollars under economic assumptions that only The Leader and his associates believe (there is some question about that). 11-5 it winds up bigger than that. Fold # 2 is that in the history of the world power and influence has never gravitated to debtor countries; it moves towards the source of capital, or to put it another way, money talks, B.S. walks. At some point the Fed is going to be the ONLY purchaser of our debt, and that sports fans is when the music stops.

A couple of things will happen none of which are any good. The dollar is going to get hammered--I'm surprised it's held up so well so far. We are on a trend to debase our currency to a point never before seen. Good for export industries but we are a nation that consumes vast amounts of energy a great deal of which is imported. Our balance trade will never be in balance. Forget about The Leader's energy plan: fossil fuel will remain our primary source of energy for the foreseeable future--your lifetime--and there is NO provision in any plan I have seen to expand domestic sources of fossil fuel and not a word about the cleanest energy source of all, nuclear power. Fossil fuels are priced in dollars; it is no where written that they will always be priced in dollars. As the purchasing power of the dollars received by energy exporter decreases it is certain that a new basis for payment will arise. We can't print that, it ain't ours. We have to buy it or....yep, that's right, borrow it. And what happens when you can't print the stuff you have borrowed come repayment time? How fast can you think Third World?

Another thing that must happen eventually. Inflation. There's no getting around that and maybe at the end of the day that's what The Leader and his boys have in mind. If you can't repay it, inflate the hell out of it and reduce its value and keep on printing! Of course there may be some downside to that plan. How quickly can you think Reduction in Quality of Life and Rise in Cost of Living?

If my simpleton economic theory is correct, influence in the world is no doubt going to shift to a new breed of "have" nations while we become part of the "have nots." From our economic dominance came our overwhelming military dominance but this will surely slip in my scenario and be replaced, very probably under current conditions, by nations who hardly share our values. Are we prepared to live under a Pax Asia or worse?

Can my very pessimistic trend be reversed? One of the reasons the Fed seemed to be saying they wish to go a bit more slowly is that there may be a bit of insecurity as to how well can they control this thing. If things are looking to get ugly, can they turn on a dime? And if they do what will be the result. Certainly, today's concern is deflation but history has show that inflation can rise its ugly head in the blink of an eye and stagflation in the current scenario is also a distinct possibility. But keep in mind, this is ONLY a scenario. I'm sure many of you have one as well. As for me TIPS are looking even better and better...does anyone know how to short the Curve?


Well, our boy Ken survived an apparently very close vote at the B of A board meeting today as did the present board. Just what it was he survived they will not say, but he aint goin' home jest yet. And now, an apology. I made a grievous error yesterday in stating that PIMCO had voted 22,000,000 shares against Ken. PIMCO did not, CALPERS did. It is a mistake I never should have made and hope never to make again. MEA CULPA.