NO GELT FOR GILT

Thought we might tie up a few loose ends in the thinking that we have
floated about over the past week.

Today, the most recent Gilt auction failed with few bids than needed
showing interest in the Bonds being offered. For those not familiar
with the term, a Gilt is the name for a Treasury bond issued by H.M
Treasury--the U.K. equivalent of a U.S. Treasury. From it we derive
the phrase "gilt-edged" meaning the best of the best.

Now whilst not unheard of, an auction failure is a very unusual thing
and not something that should be ignored. The out maturity was 40
years; a very long maturity for even a governmental issue. So I said
to myself, "Self, you may have gotten this one bang on as to why."

As opposed to just about every other nation in the Group of 20, and
quite a few others as well the Union of English Speaking Peoples--in
this case the U.S. and the U.K. have decided that the way out of this
nasty little patch in which we find ourselves is to spend every Pound
and Dollar that can be found or manufactured as quickly as possible by
the respective governments involved and if you can't raise the funds
through normal channels by selling bonds to the Great Unwashed, have
our Central Banks buy the damn things themselves. Somewhere, someone
got this foolish idea that a policy such as that might, somewhere
down he line result in a touch of inflationary pressure and that in
the period from now to 40 years out this just might affect the
purchasing power of a fixed rate debt instrument of that maturity. As
to the price in the midst of this thing if you own it, the trading
lads might advise you that you are long and very, very wrong.
Unfortunately, H.M. Treasury had the lads on today and got hammered.
Perhaps they had no choice but today's result does not auger well for
the next auction on this side of the pond, but of course Ben's Boys
stand ready to scoop up the excess if the long dated stuff doesn't
sell as confirmed on Monday by the Fed.

Which brings us back to our friends, the Chinese. I speculated that
they were becoming increasingly unhappy with the state of play and
were signaling that changes needed to be made while at the same time
reducing dramatically the maturity profile of their portfolio. Within
two days of that posting they floated the idea that perhaps what was
needed was either a brand new reserve currency or an alternative to
help out the dollar. SDR's were bandied about in an IMF setting.
Now, in the real world little is known about SDRs and none of it any
good, but even with that being the case I would have thought that no
rational person would if could be avoided, place any responsibility
with the IMF for anything greater than country profiles and almost
immediately the idea was dismissed throughout Europe and by
commentators in the U.S. Wrong again Charlie. I spokesman for Our
Hero, Tim announced today that there might be merit in a discussion on
the subject. One wonders whether this was the same guy that stuck in
the reference to currency manipulation in Our Hero's earlier foray
into Asian finances, our whether the D.C. gang was merely buying time
to try to figure out how to address the question more fully--having
nothing else much better to do. Of course with this mob there's
always the chance that it just might be another mistake, but it did
engender a call from Europe today asking me if, "You chaps have cone
stark raving mad?" (he was a Brit). I demurred.

Anyway, it seems to me that the place to be in a couple of weeks time
is at the G20 meeting in Praha. I sincerely hope that our side has
it's act together and doesn't try to turn this thing into a discussion
on greater governmental intervention and oversight in the financial
world for I suspect the Euros are going to have none of it. Which
means that Our Hero and his boss had best get their act together. The
Boss was a long way from having it together at his presser last
night. The specter of U.S/U.K. provoked inflation is not a welcome
sight to these folks who don't care much for us for starters. But I
guess The Boss will be ready for he is a really smart guy...or so they
tell me.