There was no considerable period of calm or relaxation, but the Fed did keep things interesting. For the week, the Dow and S&P500 declined less than 1%. The Morgan Stanley Consumer index added 1%, with the Utilities up less than 1%. The Transports were hammered for 6%, while the Morgan Stanley Cyclical index dropped 3%. The highflying broader market suffered a setback. The small cap Russell 2000 declined 2.5%, and the S&P400 Mid-caps were down 2%. The NASDAQ100 lost 2% and the Morgan Stanley High Tech index dipped 1%. The Semiconductor, The Street.com Internet, and NASDAQ Telecom indices declined 2%. The Biotechs declined 1%. The financial stocks were especially volatile, with the Broker/Dealers ending the week down 2% and the Banks less than 1%. With bullion down $5.50, the HUI gold index dropped 3%.

The Fed had the bond market unsteady as well. For the week, two-year yields jumped 10 basis points to 1.77%, and five-year yields rose 9 basis points to 3.15%. Curiously, 10-year yields gained only 6 basis points to 4.13%. Long-bond yields were only 2 basis points higher at 4.97%. The mortgage market was not as composed, as benchmark Fannie Mae MBS yields jumped 13 basis points. The spread on Fannie's 4 3/8% 2013 note widened 5 to 35, and the spread on Freddie's 4 ½ 2013 note widened 4 to 34. The benchmark 10-year dollar swap spread gained 2.25 to 39.5. December 2004 Eurdollars were hit hard, with implied yields jumping 17 basis points to 2.05%. Corporate spreads appear to have made it through a volatile week rather unscathed.

Some emerging equity markets came under pressure. The Brazil Bovespa sank 7%, more than wiping out y-t-d gains. The Thai stock exchange index sank better than 7%. More pain was felt throughout emerging bond markets from Mexico to India. Benchmark Brazilian bond yields surged 80 basis points following the Fed announcement, suffering Wednesday the worst one-day loss since July.

It was a slow week of debt sales, although lower-rated issuance remains significant. Investment grade issuers included Pfizer $1.45 billion, Freeport-McMoran $350 million, ASIF Global $300 million, ING $300 million, Florida P&L $240 million, Lincoln National $200 million, New Plan Realty $150 million, and Mack-Cali Reality $100 million.

Junk bond funds reported inflows of $251.9 million last week (from AMG). Junk bond issuers included Dex Media $451 million, Northwest Airlines $300 million, American Tower $225 million, Petro Stopping Center $225 million, Town Sports Intl. $200 million, Thermadyne Holdings $175 million, Nectar Merger Corp $175 million, William Lyon $150 million, Atlantic Broadband $150 million, Carmike Cinemas $150 million, Interface $135 million, and Haights Cross $135 million.

Convert issuers included AAR Corp. $75 million.

International dollar issuers included Panama $750 million and Inmarsat Finance $375 million.

Freddie Mac posted 30-year fixed mortgage rates increased 4 basis points last week to 5.68%. Fifteen year adjustable-rates rose 2 basis points to 4.97%, and one-year adjustable-rate mortgages could be had for 3.59%, up 3 basis points for the week.

The Mortgage Bankers Association Purchase application index dropped 10% last week. Yet Purchase applications remain up 22% from one year ago, with dollar volume up 38.5%. Refi applications declined 5% last week and were down more than 40% from a year earlier. The average Purchase application was for $207,000, with the average adjustable-rate mortgage at $313,800.

Broad money supply (M3) expanded $17.1 billion (week of Jan. 19), with three-week gains of $78.6 billion. Demand and Checkable Deposits rose $19.1 billion. Savings Deposits added $4.3 billion ($35.7bn over two weeks), and Small Denominated Deposits were about unchanged. Retail Money Fund deposits declined $10.2 billion, and Institutional Money Fund deposits dipped $6.7 billion. Large Denominated Deposits increased $9.0 billion, with three-week gains of $70.1 billion. Repurchase Agreements increased $9.8 billion, while Eurodollar deposits declined $6.6 billion.

Total Bank Credit jumped another $32.4 billion, with three-week gains of a notable $75.9 billion. Security holdings rose $15.6 billion, with Treasury and Agency positions up $20.3 billion. Loans & Leases expanded $16.9 billion ($55.5 billion over three weeks!), with gains broad-based. Commercial & Industrial loans added $4.5 billion and Real Estate loans gained $6.7 billion. Consumer loans were up $4.0 billion and Security loans added $0.7 billion. Elsewhere, Total Commercial Paper (CP) gained $7.7 billion. Non-financial CP added $1.6 billion and Financial CP gained $6.1 billion. Over four weeks, CP is up a notable $31.7 billion, with Financial CP up $23.3 billion.

The Fed's Foreign "Custody" Holdings of U.S. Debt increased $7.4 billion to $1.113 Trillion, with 11-week gains of $110 billion.

Currency Watch:

The Fed provided speculators of Latin American currencies a bit of a scare. Brazil's real dropped 3.3% this week. Chile's peso declined almost 2%, suffering Wednesday its worst one-day lost in more than two years. Asian currencies generally outperformed, with the Japanese yen, South Korean won and Taiwan dollar rising just under 1%. For the week, the dollar index added about one-half percent. Currency markets were generally treacherous, with eye-opening volatility. The euro dipped just under 1%.

Commodities Watch:

Many commodity markets were as treacherous as currency markets. For the week, the CRB declined about 2%. With energy prices giving back some of recent gains, the Goldman Sachs Commodity index sank almost 5%. Copper this week traded to a new six-year high

January 30 - Bloomberg: "China said cotton imports rose fivefold last year and exports fell by a quarter as a domestic Shortage made textile mills boost purchases from the U.S. Imports rose to 870,059 metric tons in the period, from 171,389 tons in 2002, when the country's imports of the fiber tripled... Imports in December rose fourfold to 162,767 tons."

Asia Inflation Watch:

January 29 - Bloomberg: "Thailand's central bank said it expects the economy to expand 7.3 percent this year as rising demand for the country's goods and services at home and abroad prompts it to raise its growth forecast."

January 29 - Bloomberg: "Hong Kong's exports grew in December at their fastest pace in 11 months as U.S. and European consumers bought more Chinese-made computers, clothes and cell phones shipped via the city's ports. Exports rose 16 percent from a year earlier to HK$156.7 billion ($20 billion), after climbing 9 percent in November..."

January 28 - Bloomberg: "India's exports rose 42 percent from a year earlier to $5.4 billion, boosted by Christmas demand in the U.S. and overseas markets. Imports rose 45 percent to $7.2 billion, and the trade deficit widened to $1.7 billion from $1.1 billion...Exports rose 14 percent to $42.4 billion in the nine months through December..."

Global Reflation Watch:

Japanese financial authorities added a record $67.5 billion to their dollar reserves during January (Dec. 27-Jan. 28). This was about one-third of total 2003 purchases. And over the past five months, the Japanese have increased reserves by a stunning $185 billion, or 55% annualized. The dollar declined slightly against the yen in the face of January's unprecedented intervention.

January 30 - Bloomberg: "The weak dollar is one of the reasons the Bank of Japan last week decided to pump more money into the world's second-largest economy even though it is recovering, said Toshiro Muto, a BOJ deputy governor. 'The dollar has been declining on the back of the U.S. twin deficits and the Iraq situation' and financial and currency market moves warrant caution, Muto said. 'So the BOJ implemented additional policy-easing steps to show clearly its determination to defeat deflation and shore up the current economic recovery.'"

January 30 - Bloomberg: "(Japanese) Housing starts rose a seasonally adjusted 8.3 percent last month from November, the Ministry of Land, Infrastructure and Transport said in Tokyo. From a year earlier, starts rose 9.4 percent..."

January 27 - Bloomberg: "German business confidence unexpectedly advanced in January to a three-year high, suggesting executives in Europe's largest economy are optimistic they will overcome the effects of the euro's appreciation."

January 27 - Bloomberg: "U.K. manufacturers' confidence rose to the highest in almost two years this month while factory orders increased the most since October 1996, suggesting industry's recovery is taking hold, the Confederation of British Industry said."

January 29 - Bloomberg: "U.K. consumer confidence in January rose to the highest in more than a year, a survey showed, as Britons became more optimistic about the economic outlook... Higher consumer confidence along with faster economic growth add to the case for raising U.K. interest rates next week."

January 30 - Bloomberg: "Spanish banks increased home loans and other mortgages 24 percent in 2003, the biggest gain in 14 years, as lower interest rates let borrowers keep pace with spiraling home prices."

January 30 - Bloomberg: "Irish mortgage lending rose 25.7 percent in December from the year before, an almost record pace, as the lowest interest rates more than five decades encouraged more people to buy property."

January 27 - Bloomberg: "An index measuring sales, earnings and employment in Australia rose to a nine-year high last quarter as accelerating global economic growth stoked demand for exports and farmers recovered from drought..."

January 29 - Bloomberg: "Russia's foreign currency and gold reserves rose $3.6 billion to a record, the biggest weekly increase since July 1998, as the central bank bought dollars to slow the appreciation of the ruble, traders and economists said. Russia's reserves climbed to a record $82.7 billion in the week to Jan. 23, the central bank said. That is the biggest weekly gain since July 1998, when an International Monetary Fund loan helped swell reserves by $5.6 billion ahead of the August 1998 domestic debt default and ruble devaluation."

January 28 - Bloomberg: "Brazil's private banks boosted lending to the highest level in at least three years in December as interest-rate cuts by the central bank reduced financing costs, prompting consumers and manufacturers to borrow."

January 28 - Bloomberg: "Chile's December unemployment rate was the lowest since 1998 as record-low interest rates helped manufacturers boost production and powered new construction. The jobless rate fell to 7.4 percent in the three months through December from 8.1 percent in the three-months through November..."

Domestic Credit Inflation Watch:

January 29 - Bloomberg: "The Bush administration projects this year's budget deficit will reach a record $520 billion, about 10 percent more than previous estimates, because of the cost of rebuilding Iraq, according to a congressional aide and a White House official."

January 27 - MarketNews (Joseph Plocek): "Detailed state data on Q3 Personal Income showed widespread growth, as net earnings increased in all states and the District of Columbia, the U.S. Commerce Department reported Tuesday. Net earnings grew faster in 38 states, versus an acceleration in 23 states and the District of Columbia in Q2, the data showed. In addition, the states in the highest quintile for income gains were located in the Plains and Southwestern parts of the country, though good gains continued in the middle of the U.S. down through Texas. Personal income for the nation grew 1.1% in the third quarter, compared with 1.0% in the second. Earnings for the nation grew in every
industry for the first time in more than two years, the Commerce Department said."

January 26 - Dow Jones: "The global hedge fund industry attracted a record $60 billion in net assets in 2003, almost quadrupling the $16.3 billion inflows of 2002, research firm Tass said Monday. Hedge funds now have between $725 billion and $750 billion under management worldwide, Tass said."

The Chicago Purchasing Managers index rose a stronger-than-expected 6.7 points to 65.9, the strongest level in almost ten year. The Production index surged 7.6 points to 76.5, the highest since 1983. The Production index jumped 19.4 points in only four months. Prices surged 10.5 points last month to a strong 67.8, reversing December's sharp decline. However, Employment declined 1.2 points to an unimpressive 48.3.

January 29 - Dow Jones (John Conner): "A Federal Home Loan Bank mortgage purchase program that competes with Fannie Mae and Freddie Mac in the secondary mortgage market registered a 158% volume rise in 2003. 'By all measures, the MPF (Mortgage Partnership Finance) program is rapidly gaining market share,' said Alex Pollock, president and chief executive of the FHLB of Chicago... According to a progress report on the program issued by the Chicago FHLB, more than $72.1 billion in MPF loans were funded through the FHLBs during 2003, up 158% from 2002 volumes. By comparison, the total volume of mortgage originations grew by about 35% from 2002 levels. Total MPF assets outstanding stood at $86.7 billion at the end of 2003, up 108% from $41.7 billion a year earlier..."

While it doesn't make for entertaining reading, I will nonetheless again this week note some of the earnings highlights from major U.S. financial institutions. I remain focused on asset growth and the nature of liabilities created in the process of Credit expansion. It appears that non-bank liabilities are expanding at a much more rapid pace than bank liabilities. At this point, I would suggest that the end of the refi boom has been somewhat of a drag on bank assets, while a plus for the "non-bank" sector. Looking ahead, we should expect the "non-banks" to play an even more instrumental role in providing the Credit to sustain the California Housing Bubble and the national Mortgage Finance Bubble.

SallieMae recorded Total Managed Student Loan Acquisitions for the year of $20.7 billion, up 25% from 2002. Fourth quarter acquisitions were up better than 50% from Q4 2002. Total Assets expanded by $4.7 billion, or 31% annualized, during the fourth quarter to $64.6 billion. Total assets were up 21.5% y-o-y.

At American Express, "The 17% increase in worldwide billed business (card usage) resulted from a 13% increase in spending per basis cardmember and 6% growth in cards in force. U.S. billed business was up 15% reflecting growth of 15% within the consumer card business, a 20% increase in small business activity and a 10% improvement in Corporate Services volume." During the quarter, American Express expanded Total Assets by $11.0 billion, or 27% annualized, to $175 billion. Total Assets were up 20% over the past five quarters.

Freddie Mac's Total Book of Business increased $12.4 billion during December, a 10.6% annualized rate. For the quarter, the company's Book of Business increased $58.9 billion, or 17.4%, the strongest growth since 2002's second quarter. Freddie's Retained Portfolio increased by $2.5 billion (1.6% annualized), following the third quarter's extraordinary $55.6 billion (38% annualized) expansion. For the year, Freddie's Book of Business expanded $98.8 billion, or 7.5%.

Combined Fannie and Freddie Book of Business increased $129.3 billion during the fourth quarter (14.9% annualized) to $3.61 Trillion, the second biggest gain on record (up almost $233 billion, or 16.4% annualized, during the final five months of 2003). For the year, Combined Book of Business was up a record $477.1 billion, or 15.2%. Combined Book of Business was up 34% over two years (up $906.4bn), 67% over three years (up $1.332 Trillion) and 135% over six years (up $2.07 Trillion).

Countrywide Financial "consolidated net earnings reached $564 million, advancing 121 percent over fourth quarter last year." Total Assets expanded at a 24% annualized rate to $97.9 billion during the fourth quarter. Total Assets were up 69% y-o-y and a stunning 520% over three years. It is worth noting the liabilities created to fund this ballooning balance sheet: Notes Payable increased $19.63 billion to $38.92 billion; Repurchase Agreements increased $9.38 billion to $32.01 billion; and Deposits increased $6.12 billion to $9.23 billion. For the month of December, Purchase fundings were up 23% from November and were 38% above December 2002. December Home Equity and Subprime fundings were both up 11% from November, with gains over one year ago of 55% and 93%, respectively. Non-purchase/refi fundings were up about 6% from November but down 51% from December 2002.

Southern California bank/mortgage company IndyMac posted "earnings of $43.3 million, up 22% over the fourth quarter of 2002." To compensate for a significant decline in mortgage originations, the company has dramatically increased its lending portfolio (Loan up 100% y-o-y). During the quarter, Total Assets expanded $1.2 billion, or 39% annualized, to $13.24 billion. Total Assets were up 38% y-o-y. On the liability side, Advances from Federal Home Loan Bank were up 81% over twelve months to $4.93 billion.

Mortgage REIT Impac Mortgage Holdings reported fourth quarter Net Earnings of $38.6 million, up 79% from Q4 2002. Total Assets expanded by $1.65 billion, or 73% annualized during the quarter, to $10.67 billion. Total Assets were up 63% y-o-y. Impac issues CMO (collateralized mortgage obligations) liabilities to fund its mortgage holdings, with CMOs up 69% y-o-y to $8.52 billion. It is worth noting that, according to Bloomberg, total 2003 CMO issuance was up 26% from the previous year's record to $1.053 Trillion. CMO issuance totaled $187 billion during 2000, $306 billion during 2001, and $838 billion during 2002.

December Existing Home Sales were reported at a stronger-than-expected rate of 6.47 million units. This was an impressive 8.9% above a strong December 2002. Average (mean) Prices were up 8.7% y-o-y to $222,500. Calculated Annualized Transaction Value (CTV) was up 18.5% y-o-y to $1.44 Trillion, with two-year gains of 44% (prices up 16% and volume up 24%), three-year gains of 64% (prices up 25% and volume up 31%), and six-year gains of 101% (prices up 44% and volume up 39%).

December New Home Sales were reported at a somewhat less-than-expected annual rate of 1.06 million units (although November sales were revised higher). Sales were about unchanged from a strong December 2002, although Average (mean) Prices were up almost 10%. Interestingly, the Inventory of New Homes was up 10% y-o-y, with the dollar value of inventory likely up about 20% (up about 40% over two years). Combined December Existing and New Homes Sales were at a 7.53 million annualized rate, up about 8% y-o-y to the third strongest sales month on record. Existing and New combined CTV was up 17% y-o-y to $1.716 Trillion, up 40% from two years ago, 58% from three years ago, and double the level from December 1997.

The ballooning Mortgage Finance Bubble fueled a banner year for our nation's housing markets. The year saw 6.1 million Existing Homes sold, up 9.5% from 2002's record. New Home Sales were up 11.5% to a record 1.085 million. A combined 7.185 million Existing and New Homes were sold during 2003, up 9.8% from a record 2002. For comparison, there were total homes sales of 2.402 million during 1982, 3.754 million during 1990, and 5.184 million during (pre-Bubble) 1997.

This week from the California Association of Realtors (CAR): "The median price of an existing, single-family detached home in California during December 2003 was $404,520, a 19.4 percent increase over the revised $338,840 median for December 2002, C.A.R. reported. The December 2003 median price increased 5.1 percent compared to a revised $384,930 median price in November... Statewide home resale activity increased 11 percent from the 573,790 sales pace recorded in December 2002... C.A.R.'s Unsold Inventory Index for existing, single-family detached homes in December 2003 was 1.8 months (compared to 4.3 months nationally). "Nearly every region in the state posted double-digit increases in the median price, with the Riverside-San Bernardino region reporting a gain of more than 32%," said ...CAR chief economist Leslie Appleton-Young. The average (median) price for single-family homes throughout the entire state inflated $65,680 during 2003 and is up $87,400 (28%) in 20 months. Average condo prices surged $52,210, or 20.6%, to $305,770 (also up 28% in 20 months). Home Prices were up 26.8% in greater Los Angeles, 28.8% in Monterey County, 23.8% in the High Desert, 21.8% in Northern California, 22.8% in Palm Springs/Lower Desert, 22.2% in San Diego, 22% in Ventura, and 18.5% in Sacramento. Even the San Francisco Bay Area posted a 13.6% y-o-y price gain to $582,320, with Santa Clara up 5.9% to $570,000.

It is worth noting that average (median) California Single-family Home Prices were up 44% over two years, 66% over three years, and doubled in just six years. Median prices inflated $19,390 during 1999, $25,880 during 2000, $37,940 during 2001, $57,510 during 2002, and $65,680 during 2003. Golden State Condo prices were up 43% in two years, 70% in three years, and 116% since December 1997. Condo prices inflated $6,530 during 1999, $18,560 during 2000, $34,150 during 2001, $39,460 during 2002, and $52,210 during 2003. One of history's great asset inflations runs unabated, while receiving scant attention from the financial or economic community.

Central Banking by Ruse:

After a few days of strained fixation and rumination over a few little words, it seems appropriate to take a step back and attempt to again coax our tired eyes to focus on the hazy big picture. And while blurry eyesight does allow one's prejudiced imaginations to conjure up seemingly appealing visions, I do not waver in my view that we are witnessing an especially unseemly ongoing effort by the Fed and Administration to Sustain Unsustainable Financial and Economic Bubbles.

It is the increasingly precarious dynamics of sustaining ballooning U.S. Bubbles, worsening economic maladjustments, and out-of-control financial markets that remain the focal point for our analysis. As such, we must be cognizant of the fact that historic Credit inflation is intensifying and broadening. And while the degree of excess fosters various temporarily advantageous manifestations (heightened borrowing and spending, economic expansion, and seductive asset inflation), more aged manifestations are losing their luster and turning unwieldy. I am reminded of the old juggling act that used an orange, an egg and a bowling ball.

In the face of an expanding (imbalanced) economy and wildly speculative financial markets, the Fed has installed a long-term peg of 1% short-term interest rates. The Greenspan Fed plays games, entertains and bewitches. All the while, the Fed valiantly covers its ineptness and resulting policy straightjacket in a loose cloak of moxie and flexibility. It is one hell of an act performed to a most affected and accommodative audience. What an amazing spectacle is has all become, most unfortunately.

And now, more than two years out of a mild recession, our Federal government is set to run a half trillion dollar deficit. The presidential election cycle dovetails all too well with the blow-off stage of the Credit cycle. So the capable spinmeisters play games, entertain and enthrall with heartening prognostications that deficits will be dissolved by the magic elixir of future growth. This is, at the same time, a pipedream and a con. It is a dupe not to recognize that the late-nineties' budget surpluses were an anomaly borne out of a major acceleration in private-sector debt growth, along with the attendant runaway stock market inflation and massive recognized capital gains (stock options!). Booming government revenues (federal and state - California!) were but a classic - and, as always - fleeting mirage of inflationary prosperity.

Yet the nature of future inflation ensures troubling structural deficits. First, with Household borrowings having run at near double-digit growth rates for several years now, there will be no major private sector debt expansion sufficient to fill expansive federal coffers. Furthermore, the nature of the ballooning Great Mortgage Finance Bubble fosters relatively low federal receipts (lots of tax-free capital gains!). Second, and I would argue that this point is not today generally appreciated, the character of inflation has evolved over the past few years: government expenditures are and will continue to be pushed higher by generally rising prices (energy, defense procurements, wages, benefits, medical costs, services, etc.).

Not only were late-nineties surpluses buoyed by artificially inflated revenues, expenditures were for a time held back by the lagging nature of general inflationary pressures. Or, stated differently, revenues were inflated immediately, while it took some time for costs to catch up - but they have. Going forward, unrelenting Credit inflation and key demographic developments ensure that general cost pressures - and government expenditures - surprise on the upside. Then later, when the Bubble economy inevitably loses air, government deficits will shock as they spiral out of complete control (and plan on throwing in a run of bank failures... perhaps a GSE bailout or pension system nationalization).

As such, there was an important time and place for the eighties' tax-cut crusaders. These tough mavericks provided a wonderful public service that has evolved to undiscerning disservice. You know, one can see truly marvelous results after administering moisture to a parched potted plant. But overstating the medicinal properties of common tap water becomes increasingly risky business. And one of the dilemmas associated with stubbornly refusing to study and appreciate underlying issues - while mindlessly sustaining Bubbles - is that the system just keeps on pouring water. All the while, it is much too easy to convince oneself that things are looking better; after all, long ago it was proved that water was a lifesaver.

Excessive moisture, however, will eventually nurture "black mold." In the midst of 20% housing inflation, California home buyers are today afforded 3.6% borrowing rates. The resulting Credit excess, fraud and gross misallocation of resources is momentous and self-reinforcing.

It is interesting to again note that 10-year Treasury yields increased only 6 basis points this week. Yields are down 12 basis points year-to-date. And while there was certainly a violent initial market response to the extinction of "considerable period," the bond market appears notably less than intimidated. The Credit market's complacency can be forgiven. It was more than a decade ago that James Carville commented, "I used to think if there was reincarnation I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone." The intimidation factor has surely doubled over the past ten years, although this wouldn't come close to keeping up with the expansion of total Credit market debt.

Curiously, the biggest reactions to the Fed's pronouncement were in the currency, gold and commodity markets, along with many emerging debt markets. My own view is that the surprising move away from "considerable period" was, as much as anything, the Fed seeking to use a rubber bullet to instill the fear of death in those speculating against the dollar. The hope is to incite a reversal of dollar fortunes by crafting perceptions that there is an approaching end to flagrant "benign neglect." And if a hopeful Fed can somewhat calm speculative juices in the stock market, all the better.

Attempting to place myself in the cogitating, machinating mind of Dr. Greenspan, I can envisage how he would seek to use his sham bullets for selectively meting out speculator punishment. Surely the last thing he wants to do is to scare the itchy crowd with real projectiles. If there were only a way to dish out some comeuppance to those selling the dollar, fleeing the U.S. to play foreign markets, buying gold, or manipulating the small caps, while pardoning the cardinal players with their leveraged positions buttressing the U.S. Credit system. Now that would be the type of clever, sordid central banking which would bring a smile to John Law.

As far as I am concerned, Fed policy has regressed only further toward the abyss of playing games and manipulating the markets. And market participants - skilled from years of practice and remuneration - ardently play right along. The Greenspan Fed entertains itself with the illusion that it can positively impact market behavior, and the markets slyly cultivate this fantasy. And, similar to so many things in this extraordinary environment, the whole process has a semblance of functioning absolutely splendidly. Mr. Greenspan can adroitly manage speculative excess with little rubber bullets and leave the real ammo locked securely in the basement. And as long as market participants roll to the ground and moan a little bit when hit, the charade of a capable central bank and sound marketplace can continue to enthrall the world.

But there are some major, inescapable problems with all this majestic chicanery. The markets are hopelessly unsound, and they demonstrate zero proclivity whatsoever toward soundness. And the Greenspan Fed is a farce. I have simply a very difficult time believing that any of the sophisticated players would today have even an inkling of trepidation that the Fed would venture anywhere near risking the piercing of the massive bond market Bubble. The Fed has repeatedly promised as much, and the risks grow more untenable by the week. Secure in their prominence, most of the bond "masters" would even look askance at playing along with the rubber bullet ruse - leave that to those wannabes diddling with stocks, credit default protection, or emerging markets.

And, hopefully, I am coming with a little substance to conclude my latest rant: The bottom line, as I see things this evening, is that the Fed avoids doing anything to assuage runaway Credit market leveraged speculation or systemic lending excess. Indeed, one could proffer the argument that the Fed's rubber bullets Ruse dampens stock market speculation and, perhaps, even temporally lends support to the beleaguered dollar (but I wouldn't bet on it!). But these dynamics could actually prove, somewhat ironically, constructive for bond market speculation and Credit excess. Yet, the only hope for the dollar is to rein in out of control Credit and liquidity creation. It today appears especially unlikely.

Back during King Dollar, the Fed had considerable leeway in managing "reflation." But, with repeated reflationary manipulations, the Credit Bubble became so enormous and all-encompassing. There were deemed no acceptable alternatives but to open the floodgates and sacrifice the value of our currency. Bubbles were set loose globally, engulfing emerging debt and equity markets. At home, these dynamics enticed the speculating community back to the stock market - the return of the Bubble. Meanwhile, unconstrained and ultra-cheap finance sparked the parabolic blow-off stage for the California Housing and National Mortgage Finance Bubbles.

The resulting surge in Credit inflation - both domestically and internationally - has been especially seductive, pleasing and provocative. I would argue strongly that it is without historical parallel. And there is today no managing the degree of excess or its inflationary manifestations. Increasingly, we sense an important "breaking of the ranks" of global central bankers. A few are responding to the inhospitable environment by cutting rates. Others have commenced the process of returning to less accommodative yields. Some central banks are buying dollars (in at least one case in unprecedented amounts); others are supporting their own currencies as global speculative flows turn erratic. No longer must global central bankers feel like they are all winners. Perhaps there has been a concerted behind-the-scenes call for the Fed to act, providing the impetus for this week's Ruse.

Clearly, things have evolved a long way toward the Fed losing complete control of the inflationary process. It will be fascinating to measure the half-life of Greenspan's recent Ruse. Especially in merciless currency markets, traders tend to be keen to expose weak hands. And while I don't at this point view Fed rate hikes as imminent, I would expect continued dollar weakness to force the Fed's hand. The Ruse would be over and things would turn decidedly interesting.