Inflation Debacle Is Approaching Metaphysical Proportions.

This morning I saw this article from Jesse Eisinger about Paul Singer and other hedgies paranoid fantasies about encroaching inflation.

His argument can be summed up as: just because we don’t really see inflation it doesn’t mean that the inflation bugs’ paranoia isn’t justified. It’s just that they simply observed that every time Fed gets involved with its monetary policy it ends up inflating some kind of bubble. As an extension of that thought, he argues, all those bank-saving maneuvers and stress-tests were really for the show, to restore public confidence, but really did nothing to improve banks’ balance sheets.

Krugman weighed in on this, of course.

Sorry, but I don’t buy that.

For one thing, if you want to claim that the stress tests were all fake and the banks were truly insolvent, shouldn’t we have seen a reckoning by now? I’d say that in retrospect it’s clear that many assets really were temporarily underpriced thanks to the market panic, and that once the panic subsided the big banks were revealed to be in better shape than many people (including me) believed.

Which really brings entire discussion into the metaphysical. Does something exist if we don’t observe it? Even if you have to contort yourself to find inflation in the Hamptons and in Aspen, it doesn’t mean it exists. Not the way Paul Singer and the hedgies would like it to exist.

They almost remind of people who see Jesus on every piece of toast. They see it because they want to see it.


Bill Gross’s Come To Jesus Moment.

Bill Gross, the rock-star bond manager of Pimco (and now of Janus Capital), whom I frequently criticized on my blog for being wrong on Treasuries and the Fed, does a complete 180 in his recent letter to investors.

In short, after he dispenses with philosophical ruminations, he comes to conclusion that monetary policy isn’t evil. It simply isn’t enough to get us out of subpar growth and should be combined with fiscal policy (you know, like, spending by the government).

The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side – from the dreaded government side – where deficits are anathema and balanced budgets are increasingly in vogue.


Bond Vigilantes’ Rage is Misplaced

As many of you know I always wondered about how the supposedly brilliant “bond vigilantes” have missed the biggest gorilla in the room – Bernanke. Well, they did and it bugs them BIG TIME. It wasn’t supposed to be that way, but that’s what happened. So rather than being a little introspective, they blame a guy who had access to certain tools and, gasp(!), decided to use them. Now they’ve reached a point of such ideological fervor that they would rather bet against their positions, just to make a statement.

Why are the bond vigilantes purposely driving down the market value of their stock-in-trade, anyway? Part of the reason is ideological. They hate Bernanke as an interloper, and Obama for the same reason, so they are reluctant to believe that the economy is actually recovering under the leadership of those two faculty-lounge geeks.

The vigilantes are like the hedge fund guys who share the same ideological hates and have been (wrongly) shorting the stock market for several years. Now both the bond vigilantes and the hedgies see a chance to “get theirs” back — notice how the friends of hedge funds have quickly used the bond rate spikes to renew their cable TV calls for a deep stock price “correction” that will bail out the hedge funds and give them a chance to get back into the market on the cheap.