the Fed is no longer driving inflation(ZT)

"Yesterday, Don Kohn, number two man at the Fed, told the world that America's central bank would be "flexible and pragmatic."

People knew what that meant. The Fed is prepared to cut rates next month.

Soencouraged by this were investors that they set about buying everystock in sight. The Dow rose 331 points. That brings the total to 546points gained in the last two days. Not bad.

But what does it mean? Less than investors think.

Wehave opined that the great flood of cash and credit, enjoyed byinvestors for lo these many years, is now ebbing away. Yesterday'sbackwash seemed to contradict us. And we've been doing this for far toolong to imagine that we know God's Own Plan for the U.S. economy.Anything can happen - and usually does!

But let us look at whatis happening. The Fed funds rate is 4.5%. Investors now imagine that a50 basis point cut is coming. That will take the signal rate down to4%. But in this instance, the Fed will not be leading…it will befollowing. The 10-year note already yields less than 4%. Bonds havebeen falling since June. They are just another of the many signs ofdeflation - of a draining away of credit, cash - liquidity - from themarkets.

In other words, now the Fed is no longer driving inflation

…it is trailing along behind deflation, trying to keep up with it.

Weindented that last sentence, because we didn't want you to miss it; weare so proud of it. Remember it. Quote it to your friends. To put itanother way…the Fed is no longer pulling on the string…it is pushing onit. In offering money at 4% (just a hypothesis) it will only becatching up to what investors have already been doing.

Now, it'sprivate lenders who are doing the pulling. They're reluctant to lendinto the open market; because they fear they won't get their moneyback. But they're happy to lend to the U.S. government. Spreads arewidening - always a sign of a tightening credit market."


(This is an 11/29 Daily Reckoning for you who see this on 11/30)