"Promises are like babies: easy to make, hard to deliver"
Author Unknown

Here we go again. Ben Bernanke and Co last week delivered another strong message to the commodities bears all around the world- "we can't really tell if it was/is a bubble until after it blows up"... Unfortunately, it does seem as if my last week's prediction about Fed's inability to raise rates in the middle of the "political season" is actually becoming a reality.

Faced with a tough tradeoff between growth and inflation "Chairman Ben" and Co came up with a clever way, but also potentially dangerous way of solving the "Bernanke's dilemma"- "outsource" the inflation fighting role to other economies around the world instead of doing the dirty work themselves. In his speech last week, Fed's Vice Chairman Kohn delivered a message that seems to have not only borrowed major points from the stories of the "commodity" bulls, but also gave a pretty clear answer to "will they really raise interest rates in August?" question- "Not gonna happen!"

"The reasons for the trajectory and persistence of increases in prices of food and energy this year, as global growth has moderated, are not entirely clear.(VY-Heh?) The upward trend in prices of food and energy over the past several years, however, importantly reflects the pressures posed by rapidly growing demand in developing economies against relatively inelastic global supplies of commodities.

...Additionally, in those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability"

The translation basically goes like this- "US monetary policy has nothing to do with ever rising commodity prices. These high prices are merely an indication of sky rocketing demand from BRICs. And because the US Federal Reserve and the US Economy have had nothing to do with this rise, they should not be obligated to participate in the clean up. The "new guys on the block" (BRICs) and stubborn Europeans need to fight the inflation battle on their own!- slow down economic growth engines using all means necessary- raise rates, further adjust currency exchange rates etc. US won't be raising rates any time soon." -Case closed...

Mr. Market's reaction?- Dow down 400 points or so, Gold up $50, new multi year low for the DJIA, new highs for Crude Oil and virtual death sentence for some/(all?) the Big 3 US auto and RV/Boat makers. I certainly admire the creativity of this "heads I win, tails you lose" interest rate logic- it is almost guaranteed to win some political points here at home. But it is also a very dangerous one for the world economy- relying on China and India to remove the excess liquidity from the world's economic system, is in my mind equivalent to a firefighter waiting on his colleagues to return from vacation in the other state, to help him put out a house fire that has been already been raging on for a while- it is very possible that by the time they come back, there won't be a house to save...

Continued...