Over the last few fortnights, market observers have witnessed a parade of Fed officials strutting their inflation fighting prowess. They talk about the "history" of the Fed and their "credibility" on this front. Amazingly, the market cognoscenti seem to hang on their every word. The Dollar spikes, metals plunge, bonds and stocks churn based on these utterances. One is reminded of the scene in the Wizard of Oz, when Dorothy was asked to bow down before the almighty Wizard. Of course we all know the rest of that great scene, you know when Toto pulled back the curtain.

Where is Toto? Or perhaps a more accurate analogy would be where is Sgt. Friday in all this? What are the facts, m’am? This observer finds the disconnect between the Fed's utterances and their ACTIONS to be quite profound. So much so, that I am inclined (as difficult as that can be) now to just ignore the talk and propaganda and focus on the facts, m’am. Joseph Goebbels would have been proud to see his Orwellian "big lie" approach practiced so blatantly. Perhaps the time has come to get aggressive on the Toto trade?

There are several arenas that any market player can track on the Toto/Sgt. Friday trade. One glaring one that is getting scant attention is Fed debt monetization. Monetization is when the Fed prints money out of thin air, and enters the market as a "customer" to participate in treasury auctions or make open purchases. The Wizards are having quite a party right now on this front. They are showing about as much sobriety as college kids on spring break in FACT.

Prior to May 5th, and for the previous 52 weeks, the Fed "bought outright" (monetized treasuries typically) about $577 million a week. This is a number that is easy enough for even arm chair market players to follow. After all why wait for the Ministry of Propaganda to tell you all this before a flock of "group-think" Congressmen? It's in Barron's market lab section, or in the Fed's web site here: www.federalreserve.gov

But starting May 5th, the spring break smoke and mirrors drunk and orgy began. Here are the weekly figures for debt monetization by the Fed:

5-12: $2,199,000,000 (that's roughly $2.2 billion)
5-19: $1,748,000,000
5-26: $453,000,000
6-2: $1,441,000,000
6-9: $1,598,000,000
6-16: $1,914,000,000
6-23: $63,000,000 (a break in the action to clean Mr. Porcelain from the night before?)
6-30: $2,056,000,000
7-7: $569,000,000
7-14: $2,106,000,000
7-21 $2,507,000,000

The 12 week average is $1,395,000,000 per week. The last 8 week average purchases were $1,532,000,000 - 266% more than the pre-May 5th level.

And for good measure the Fed has elected to be "diligent" about fighting inflation by adding $13,345,000,000 in permanent injections into the system over the last two months.
http://www.ny.frb.org/markets/permanent.html. Permanent injections are another mechanism that the Fed uses to inject high powered money into the system. This is effectively a very low interest loan of medium duration (90 days to over a year) to selected financial institutions. Those "friends of Al" then invest and/or speculate in the debt markets. You will often see these "loans" materialize just before a big Treasury auction, when they are then are used to absorb this paper.

Here are the weekly numbers since early May:

5-12: $1,692,000,000
5-24: $783,000,000
5-26: $796,000,000
6-2: $1,400,000,000
6-8: $1,000,000,000
6-9: $1,035,000,000
6-23: $1,390,000,000
7-7: $1,557,000,000
7-13: $398,000,000
7-14: $1,898,000,000
7-22: $1,396,000,000

Then there's the obvious one, a Fed funds rate that is at least several percentage points lower (if not more) than the real rate of inflation. Are the Wizards inflation fighters? I submit in the Land of Oz only, just the facts, m’am.