AN ENORMOUS SUCCESS

Then again, turning five isn't the hardest thing in the world but the triplets sailed through it with nothing but smiles and laughter.  To be that young and innocent...but we are not and it's back to business.

It would appear that after the great celebration of last week over the supposed solving of Europe's problems, reality has once again set in despite the French note auction of yesterday which immediately after it closed went to a negative yield.  The wise folks out there immediately proclaimed that France was surely in the catagory of Germanydespite the fact that anything in France that looked like a financial institution was ordered to bid on the damn thing and a six month auction tells us nothing about anything  The fact of Spanish yields inching above 7% again tells us a great deal more and none of it is good and the Spanish being given an extra year to meet the financial standards ordered by Brussels (which they have already said they will not meet) tells us a great deal more.  Not only are things not good, they are not getting any better.

Meanwhile, the great Libor scandal continues to grab the headlines with the special commission now trying to figure out who knew what when between the Chairman of Barclays and the CEO.  Yawn.

John Taylor of Stanford and the Hoover Institute, a very smart guy, had a piece in the WSJ the other day saying far more eloquently than I some free standing facts that I have been talking about for some time; to wit if you REALLY want to investigate interest rate manipulation look no further than the world's central banks and by all means start with the Fed.  As opposed to the terrible effects of the Libor manipulation--which, curiously, have yet to be identified--the central banks have caused real damage and it is there for all to see.

With the dollar as the reserve currency there is no point in not singling out the Fed as the culprit in this international dance macabre and the reason begings with one single fact; the dual nature of the Fed's mandate.  Somewhere along the line someone got the bright idea that a central bank should be more than a guardian of the risk of inflation and take on the added duty of assuring, to the greatest extent possible, full employment through the use of monetary tools.  Needless to say, the first role is often ignored in pursuit of the second, and particularly so by the political forces at play as inflation is the greatest friend a free-spending politician can have (not to be redundant) in most cases.  Of course the only tool a central bank has is to regulate the supply of money and in that is the rub: they will never admit to playing with interest rates but that is exactly what they are doing.  When the Fed does it the entire world is affected and the results are often not immediately apparent, not fully understood or simply ignored by the Fed who have adopted the view first expressed by Treasury Secretary James Baker who straightforwardly told a foreign finance minister, "The dollar is your problem not ours."
A more honest man never lived.

The last time the Fed really went after inflation or the threat thereof was back in 1980 when Paul Volker--a Carter appointment of all things--killed it in this country, stone, cold dead through the brutal application of monetary policy.  Of course he killed Latin America stone, cold dead as well and for a full ten years, and damned near killed the American banking system and a few other systems as well, but that was the last time in recent memory that our central bank showed any kind of monetary restraint and what we face today is the result of the distortions in a global marketplace that unfortunately continue and are magnified by the current policy of the administration in Washington.  Tune in tomorrow and we'll try to stroll through the last 20 years of financial history.

GENTLE ON BEN

The Chairman was very good today. The press was perfectly awful. I could have looked good in front of that room full of frauds. The questioning was about as difficult as that might come from MSNBC interviewing The Leader, who by the by, grabbed some national tv time this morning to announce that he had, in fact, been born...or some such thing. Anyway, back to Ben

Despite the absence of the press, the Chairman was actually rather interesting in a couple of respects. As advertised, he announced that QE II would indeed end and in response to a penetrating question yes, it was indeed a success. More interestingly, however, he seemed to indicate that QE III was not in the cards (expected), adding that inflation had turned out to be a bit higher than expected and that inflationary expectations were considerably higher. A real Dick Tracy moment, that. Nevertheless, he indicated that there was to be no real chage in the Fed's accomodative stance for the foreseeable future. The stock market loved it and moved smartly higher. Gold ratched up 22 bucks, silver moved up over 5%, oil futures stayed well above $112 (Brent $125) and the good ol' dollar went deeper into the crapper. Oh yeah, a strong dollar is in America's interest but that's really the job of the Secretary of the Treasury. The Suit must have loved that one.

The comments about inflation proved to be a bit of a surprise but he reverted back to the headline vs. core nonsense and of course no one asked him whether it wasn't about time to change the weighting of food and fuel from 20% to something that is more reflective of how people live. Then again, if they had he might have offered 15%. The guy is nothing if not confident. As to when they might tighten? Trust me, we'll know when to do it and we'll get it right. Uh huh. As to the effect U.S. monetary policy is having on emerging markets and their battle against inflationary pressures? It was a damn near reprise of ol' Jimmy Baker's greatest line: "The dollar is our currency and your problem." Do what you have to do and don't look to us. They're going to love that one in Singapore, Brasil and points east.

I still don't understand the lack of concern for the international view as to his policies. The Chairman, who seems to be a heck of a nice guy, is almost dismissive of what is a growing disgust world-wide. Maybe he is the smartest guy in the room and everyone else is a dunce. Could be, but it would be the first time that there was such a broad divergence of mental acuity among folks engaged in the same game. I don't think he's being disingenuous; I really think be believes he is absolutely correct and maybe he is, but I have a very helthy suspicion of pure academics--even one as bright as this guy. You know the old tale about an economist building his dream house? First, he assumes a foundation...In the mean time, I like my position in commodities.

News flash: The Greeks came to the conclusion that they are in worse shape than originally thought and need more money from their Euro buddies than is on offer. Who would have thunk it.