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

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Today's Fed meeting did not directly add any additional fuel to the dollar's recent vigor (now nearing 73.95 on the index) but- if nothing else- gold showed once again that it is feeling the impact of an oil price that has shed some $30 from its recent record price and continues to aim lower. Crude was last seen trading at $119.81 per barrel, down $1.60, dropping t about as fast as rain from former would-be hurricane Edouard.

The US central bank is still seen as ratcheting up (at least) its anti-inflation rhetoric today, as expressed by Fed member Fisher's dissent. This, on the heels of Monday data showing a sharp spike in prices that has people talking in terms not heard in nearly twenty years. Whether or not the interest rate trigger is activated today or next month, is almost academic. The rate hikes will come, one way or another. There are growing expectations that such a torpedo will soon be launched despite the possible collateral damage it might inflict on a less-than-robust US economy. Not that others are doing particularly well: Eurozone retail sales took a larger-than-expected hit and evidence of slowing in China had local stocks on the back foot overnight. Slumping raw materials values are intensifying fears that the vertigo-inducing growth rates we have been witnessing over recent years in the region could indeed be headed for a post-Olympic 'adjustment' phase of some magnitude.

New York spot gold continued under major duress again, losing $14.80 to $879.00 per ounce and has now reopened the opportunity window for dips to the next channel of between $845 and $875 if current trends intensify. But, where there is danger, there could also be opportunity - the hope that Indian demand might perk up amid lower prices and make for a better fall pattern in purchases has sprung up again. Now, we await some concrete evidence of such a change in attitudes. Silver fell well below $17, losing 24 cents to $16.65 while platinum was recovering a bit, now at $1569 but the noble metals complex remains buffeted by automotive sector woes. Palladium showed no change at $351 per oz.

Since it is that time again, let's look under the hood at the Fed once again and see what might be transpiring behind the scenes and why. The US central bank's nearly year-old liquidity pumping exercise came to a halt in June and appears to be turning into a possible campaign to rewind at least some of the tape. The Fed's accommodative stance has very likely helped keep whatever this 10-month phase might eventually be called out of a deeper contraction, but it has also engendered the fallout which is now regarded as possibly more dangerous than the initial threat was. No wonder Fed insiders have been, and continue to be...ummm - divided on many key issues. Bloomberg bring us the story of the internal soap opera. It suffers from no shortage of drama.

Federal Reserve Chairman Ben S. Bernanke, likely to leave interest rates unchanged today, may need to sound tougher on inflation to avert the sharpest public disagreement among policy makers in more than a decade.

The fastest inflation in 17 years adds to the risk that three members of the Federal Open Market Committee will dissent for the first time since 1992. Gary Stern, president of the Fed's Minneapolis bank, and the Philadelphia Fed's Charles Plosser joined Dallas's Richard Fisher since the last meeting in June in calling for an increase in rates to limit price increases.

The trio wield more clout than usual because two seats assigned to Fed governors on the 12-member panel are currently vacant. That means Bernanke must craft a consensus that's responsive to the their inflation warnings while still heeding tumbling housing prices, a faltering economy and the worst credit crisis since the Great Depression.

``Bernanke and Kohn would struggle like heck to make sure there were not three dissents,'' said Wachovia Corp. Chief Economist John Silvia, referring to Fed Vice Chairman Donald Kohn. ``They would probably be biased in their statement to really be focused more on inflation.'' Lehman Brothers Holdings Inc. economists forecast a ``significant chance,'' though less than 50 percent, that Stern, 63, will join Fisher and Plosser.

The FOMC is scheduled to announce its decision at about 2:15 p.m. in Washington. The benchmark rate will be held at 2 percent, according to all 69 economists surveyed by Bloomberg News. Fisher, 59, was the lone official to favor higher borrowing costs in June, his fourth dissent of the year. The rest of the panel voted to keep the federal funds rate unchanged, ending a series of cuts that had slashed it by 3.25 percentage points since September.

Stern said in a July 18 interview with Bloomberg News that the central bank shouldn't wait for housing and financial markets to stabilize before tightening. Plosser, 59, who dissented from two reductions this year, said July 22 that rates should rise ``sooner rather than later.'' A vote for tightening by the three district-bank presidents would fuel speculation among investors that Bernanke will be pushed into an increase earlier than he might prefer, said Standard & Poor's Corp. Chief Economist David Wyss.

``It puts the Fed in an awkward position,'' said Wyss, a former Fed economist based in New York. The central bank ``may end up tightening just as we go into a deeper recession,'' he said.

Futures traders aren't betting on a move before September, though they do anticipate a quarter-point increase by December. Ten officials will decide the price of money today: Four are district-bank leaders that rotate into voting slots each year, joining five Washington-based governors. The New York Fed president has a permanent slot as the FOMC's vice chairman and tends to back the chairman.

The other district-bank president with a say is Cleveland Fed chief Sandra Pianalto, who hasn't bucked the consensus once since her appointment in 2003. One of the vacant governor seats will be filled by Elizabeth Duke, who has been confirmed as a governor by the Senate, though not yet sworn in. Bernanke has acknowledged inflation pressures, while expressing concern about the fragility of the economy. In testimony to Congress on July 15, he described ``significant downside risks'' to growth and worsening ``upside risks'' to inflation.

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.