Past Performance is...(You Know the Rest)...

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Bernanke may be willing to accommodate dissent. Bernanke has praised the Bank of England, whose chief, Mervyn King, has been outvoted twice on rates, as a ``leading exponent of increased transparency.''

Bernanke has also opened up FOMC meetings to allow officials to speak out of turn during debates. That means the sessions may resemble the frank exchange of conflicting views common to Bernanke's discussions during 23 years as an economics professor, said Edward McKelvey, a senior U.S. economist at Goldman Sachs Group Inc. In 20 FOMC interest-rate decisions as chairman, Bernanke has recorded nine with one dissenting vote and two with a pair of `nays.' His predecessor, Alan Greenspan, had 17 decisions with one or two dissents in his last 10 years as Fed chief.

Since the June FOMC meeting, crude oil rose to a record $147.27 a barrel on July 11 before dropping 18 percent. A government report showed consumer prices surged 5 percent in the 12 months through June, the biggest jump since 1991. The last time three policy makers dissented was Nov. 17, 1992, when one governor and two district-bank presidents argued for stricter anti-inflation words or action. A month earlier, four rebelled for similar reasons.

Not all inflation signs are pointing up. Consumers last month expected inflation over the next five years to be 3.2 percent, down from a forecast of 3.4 percent in June, according to the Reuters/University of Michigan survey. Home prices in 20 metropolitan areas fell 15.8 percent from a year earlier, based on the S&P/Case-Shiller index. And, any tolerance by Bernanke for dissent may be outweighed by the need to avoid spooking investors. ``They know that the markets would not take that well,'' McKelvey said."

Continuing liquidation in the commodities complex has now brought gold prices to just above $880 amid signs that a still-improving dollar and fast-fading crude oil values are prompting an exodus of funds and their millions into other niches. Gold has thus far proven unable to show immunity from this sector rotation trend after having broken key supports in the on-going sell-off. In addition, lingering apprehensions about a global slowing phase have triggered the latest flight from commodities, and this particular one shows all the signs that it is more than just a temporary disillusionment among players. Reuters reports that Lehman Bros. has just pulled the alarm bell on the massive pile of money that is sloshing around in commodities and is raising the probability of a classic bubble pop ahead (if not already underway):

This year's explosion in commodity investments suggests investors may be overlooking volatility for performance as they pile into index funds that have amassed almost $300 billion, Lehman Brothers said Friday.

"It is important to recognize the limitations inherent in commodities given their cyclicality and high volatility," the investment bank said in a report. Lehman said it was not surprised that the weak dollar, unattractive equity markets and higher inflation expectations had all contributed to this year's phenomenal growth in commodity prices and the indices that track them.

"But we also find a potentially alarming degree of past performance-chasing momentum," it said.

Crude oil, gold, copper, soybean, corn and wheat futures have hit record highs this year, leading to unprecedented gains for commodity indices such as the Reuters-Jefferies CRB, the S&P GSCI and the Dow Jones AIG. The CRB, for instance, recorded its best quarter in 35 years between March and June. But July was also the worst month in 28 years for the index as prices of oil and other key raw materials tumbled from their highs.

In a report issued Friday, Lehman estimated assets under management tied to commodity indices at $297 billion.That was up $62 billion from the $235 billion figure it gave during a similar estimate in May. In Friday's report, Lehman said commodity indices had grown by about $98.1 billion in value since January 2006. The $62 billion rise in the last two months represents 63 percent of the two years' growth.

"We recognize that indices present an important financial innovation in opening up a previously obscure asset class to a wider pool of investors, helping macroeconomic risk management," Lehman said in Friday's report.

"However, investors should not be lulled into a false sense of security by the recent outstanding performance of commodities. Furthermore, commodity indices are somewhat peculiar in that they allow investors a long-term view of commodities through short-term rolling instruments," it said.

Commodity indices typically allow investors exposure to markets like oil without having to take delivery of crude barrels. In their simplest form, the indices require investors to roll their positions as contracts come up for delivery.The massive growth in commodity index money this year, which has coincided with record high gasoline and food prices, have led to calls for legislation against excessive speculative activity in commodity markets. Investor groups on the other side of the debate have resisted such moves.

"Our analysis suggests that (the) reality is considerably more complex and does not align with either extreme of the debate," Lehman said.

"We feel that there is room for further financial innovation in the vehicles available to investors," it said, citing newer commodity indices that limit their impact on near-term prices as one example."

Post-Fed punditry will now replace pre-Fed guessing contests. Not much has emerged however, in the way of a vote of confidence for the continued vertical direction for commodities.

Happy Trading.