Call Me Crazy, But Inflation (At Least The Way It's Officially Measured) Seems To Be A Long Ways Off....

I think there's a lack of true inflationary pressures in the economy at home and abroad, and the continued presence of deflationary pressures in housing, autos and manufacturing are still with us.

Interest rates are at quite low levels, especially compared to the shrieking from deficit and inflation hawks about exploding interest rates and a crashing dollar as foreigners finally refuse to finance our stimulative spending spree.

Someday they will be right. The problem is that I simply don't know when.

I can remember way back in 1984 when the pundits proclaimed the mounting "twin deficits," budget and trade, could not be financed by surplus foreign funds. That proved to be as untrue then as it is today.

The recent record bond sales by Uncle Sam were met with record demand. Indirect bidders -- that is, foreign central banks -- have been snapping up Treasuries like they are going out of style, which quite clearly they are not.

The Federal Reserve has openly stated that it has been a big buyer of both Treasury and mortgage bonds in an attempt to keep rates low while the issuance of U.S. debt explodes.

Despite all that, the dollar has not crashed either; the greenback has been ignoring the many calls from our most important trading partners to create a global reserve currency that would supplant the dollar as the world's repository of wealth and purchasing power.

It's just not going to happen.

That said, I would not be a buyer of plain-vanilla Treasury notes and bonds and would instead buy long-dated Treasury inflation-protected securities (TIPS). You simply are not being compensated to hold U.S. Treasury bonds and notes at these extremely low yields since they will likely rise as the economy recovers.

A steep yield curve, 245 basis points wide, from two-year to 10-year maturities is signaling an economic recovery within the next six to nine months, along with stock prices, commodity prices (despite their recent setback) and other market-based indicators. As a consequence, the short end of the yield curve looks particularly vulnerable to a sell-off here, if stocks and commodities continue to recover.

Yields may also move up if Federal Reserve Chair Ben Bernanke outlines the Fed's plans to extract the stimulus and insurance programs from the economy so as to give the market a clear timeline and process by which to judge when the Fed will allow the economy to breathe on its own.

While I am not an inflation hawk, by any means, I believe five- to 10-year TIPS are a great buy and offer not only higher real rates of return, but protection against future inflation, which some day will be a problem again -- I just can't say when.

As for Bernanke, he may not be long for the world of central banking. He made some mistakes early on, but he is decidedly the hero of the horror show we all just lived through in the last two years.

If it becomes increasingly apparent that the Obama administration wants to throw Ben to the cats and move in someone more in tune with the administration's legislative and social agenda, hopefully a very vocal media campaign will commence from some of his media fans out there to stop that from happening.

I believe Bernanke is entirely misunderstood by the current administration. Should he be removed, Obama will quickly come to realize that it is imperative to "have a friend like Ben" at the Fed, particularly after the markets respond forcefully to a monetary trap the administration may have unwittingly set for itself.