Good Afternoon,

Following three days of active US dollar purchases, currency speculators took a very brief break earlier today, as they tried to allow the currency to consolidate its near- 4% gains for the month. Other participants suggested however, that given yesterday's shrinkage in the trade gap, the greenback's rally had further to run, and that it was not the bounce of a cat in rigor mortis.At the end of the day, the release of the December sales data revealed a near-absence of visits to most stores by a certain Mr. Claus. Clearly, the US consumer is out cold, jobs gone, wallets empty, house still for sale, and has indeed (over)shopped until finally dropping. The mall frivolous mall raids of yesteryear are now confirmed to be o v e r.

Sales at jeweler to the wealthy Tiffany's were down 21% vis a vis 2008, for a telling example. Gottshalks and clothing chain Goody's both filed for Ch. 11 today, while Macy's stock took more punches than Oscar De La Hoya draws in a single match. Thus, the dollar became the asset of choice to park funds in once again today. Wise choice, at least on a day when oil fell back to near $36 per barrel and stocks headed 260-points lower.

Beige Book data showed the US economy fading across all regions last month due to the lethal combination of unavailable credit and slumping retail sales. Not that other economies are faring a whole lot better. Germany's for instance, contracted to a meager 1.3% growth rate - the worst in twenty years. China thus becomes the world's third largest economy, with the US and Japan still ahead. For the time being. The country revised its 2007 growth rate to 13 (!) percent. It will be lucky if it can show half of that unreal number at the end of 2009. And so, the economic world churns...

The beleaguered banking sector was back in the news, with Deutsche Bank reporting $6.3 billion in Q4 losses. Germany's largest bank saw its stock fall by over 10% following the shocking loss, but HSBC Holdings Plc was not far behind, showing a near 8% loss in its shares, after it was suggested that Europe's largest bank by market value might have to raise $30 billion to bolster capital and cut its dividend in half. Wells Fargo will also need to raise about $10 billion as well as cut its own dividends, following 'disappointing' earnings. The culprit? California housing.

The California (and US) housing market is seen falling at least until Q3 of 2010. Stories of expectations that Ireland's real estate values might fall 80% (not a typo) have also surfaced today. Home, sweet-no-longer home...Finally, the disassembly of Citi's component Lego pieces continues, following the Morgan Barney hat trick its management offered up late last week. Now, its consumer lending unit appears to be up for grabs. A return to the 'basic' Citibank? Most likely, as nearly two dozen of the former banking empire's businesses have already been let go of.

Amid signs that OPEC leaders are intent on augmenting the cuts in oil production in an effort to support swooning prices, black liquid gold rose to just above $39 per barrel and gave bullion the initial room to maneuver and attempt to get back to the $830 level. The going became tough however, following US government reports that crude stockpiles rose to a 16-month high as demand fell apart despite a calendar that shows 'frigid winter' at the moment. Thus, oil fell back swiftly, losing $1.67 to $36.11 per barrel. The dollar continued to climb, rising 0.29 to 84.46 on the trade-weighted index.

Today's New York spot dealings opened with a $4.00 gain for gold, but turned sharply lower in quick order, as participants remained wary of index rebalancing and as must-sell scenarios materialized once again in the wake of the retail and Beige Book numbers and the rout in the Dow. Support at $813, was breached, and bullion narrowly averted falling through $805 per ounce. Gold futures finished at a five-week low at $808.80, while spot prices were still off nearly $12 in afternoon electronic trading.

Silver was off 16 cents, at $10.55 per ounce, and touched prices lower than that during the day. Platinum fell $11 to $926 and palladium lost $4 to finish at $179 per ounce. We see practically nothing in the current background picture that suggest four-digit gold prices in the near-to-medium term. A correction to yesterday's text: economist Dennis Gartman suggest that he might be inclined to put on fresh long gold positions if bullion manages to successfully overcome $890.00 per ounce.

Merger talks between Impala Platinum and Northam Platinum collapsed amid difficult conditions in the global economy, the commodities markets, and stock markets. So much for Impala having access to relatively shallow noble metal deposits that are less costly to mine. Toyota will have its middle management purchase its own brand of automobiles ('voluntarily' of course - but we know how that goes in the Japanese workplace) following a 10% pay cut it has already taken. Imagine for a moment if GM asked its managers to buy some lovely Buick Terrazas to tool around in...nah!

Amid the on-going turmoil, emerging signs point to internal discord and lack of unity at the Fed. Hawks and doves are clashing and the results make for some interesting public statements.

Key fault lines are emerging at the Federal Reserve over the central bank's journey into uncharted monetary policy. In a speech on Tuesday, Philadelphia Fed Bank president Charles Plosser publicly took issue with positions advocated by Fed chief Ben Bernanke.

Plosser urged the Fed to proceed with caution with the new policy. On Monday, Bernanke signaled that it was full speed ahead - with existing programs needing additional resources and new ones in the works to stabilize the financial system.

It is a huge disagreement, said Robert Brusca, chief economist at FAO Economics.

While the Fed chairman has made it a practice to run a more democratic central bank, the disagreements come at a crucial time when the Fed is striving to appear on top of the current financial market crisis and steep recession. The Fed has expanded its balance sheet from $900 billion to well over $2 trillion in its efforts to restore the credit markets to health.

Bernanke has argued that focusing on the size of the balance sheet misses the point, arguing the Fed's various asset purchase programs are not easily summarized in a single number.

But Plosser said that the growth of the Fed's balance sheet was a key metric.

It is not appropriate to ignore quantitative metrics in this new policy environment, Plosser said.

On the surface, the debate is about how the describe the programs. Bernanke and Fed officials have gone to great lengths to say that the new policy is not quantitative easing similar to the Bank of Japan's actions in the 1990s. Instead, Bernanke called the new program credit easing and tried to put the focus on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses.

But Plosser is bringing the spotlight right back to the Fed's balance sheet. The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions, Plosser said.

Underneath the surface is a real concern about how and when the Fed tries to exit from its new monetary policy.

Fed officials who pay attention to the money supply believe that the Fed's current policy of printing money never ends well and the danger of inflation is very high. They believe the Fed must withdraw the stimulus before there is any sign of inflation or it is too late. Bernanke wants the flexibility to take his time.

William Poole, who recently left his post as president of the St. Louis Fed, says it is crucial that the Fed set a target for cutting its balance sheet. Poole said the expansion of the Fed's balance sheet is unprecedented and research suggests that a surge of inflation is sure to follow.

I would say if the policy is not reversed, there is a high probability that the unpleasant risk (of inflation) materializes, Poole said in an interview. I believe that the Fed should set a hard number - a target that they take seriously for the overall size of the balance sheet, he said.

Plosser also argued that the Fed has put its independence at risk by buying long-term assets. He worried that some interest groups will try to use political persuasion to stop the Fed from selling these longer-term assets even if the central bank has decided it makes sense. We will need to have the political fortitude to make some difficult decisions about when our policies must be reversed or unwound, Plosser said.

Bernanke said that he would watch this situation closely but didn't expect it to be a significant problem.

Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.

In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.

The current situation at the Fed seems eerily similar, he said.

What is discipline - where are the hard choices - when does Fed say our resources are exhausted? Poole asked.

The man about the take the helm of the country next week should be watching and listening to the Poole/Bernanke/Plosser divergences. Before it is too late. He could always ask Mr. Volcker for elder advice.