Don't Fight the Fed, Don't Fight the Tape

But now it's time to sober up and find the missing clothing, because the second-guessing has begun. Yves Smith at Naked Capitalism has compiled the comprehensive compendium of carping, starting with worries about inflation and a currency crisis, and proceeding to concerns that not even the Fed can cope with the massive overhang of dodgy debt and the negative feedback loops plaguing the global economy.

Fed skeptics can point to the public whipping of the dollar as a reminder that the printing presses will only run so long as foreigners accept their output without undue complaint. The buck is down a whopping 7% against the euro on the week and 13% since Dec. 1. Gold is up 15% since Dec. 5. Of course, this could be partly a byproduct of a returning appetite for risk, since the greenback had become such a crowded safe harbor. Still, there can be no doubt that the Fed's open-ended commitment to ransom the economy at any cost has left the currency -- and by extension the national credit rating -- under a cloud.

If you're the suspicious sort, you're probably worried that Taiwanese insurance regulators have just instructed their wards to shun U.S. mortgage debt, even that guaranteed by the government. Or maybe you're watching the yawning credit spreads on corporate debt, shrinking consumer credit and wondering whether we're not having a protracted solvency crisis, the sort that comes after years of overspending.

These are valid concerns all, but we won't know to what degree until after the Fed has bought up every IOU in sight and until Congress has passed another billion-dollar stimulus, including tax cuts. And the market seems more inclined to give the authorities the benefit of the doubt than it's been at any point in the last nine months.

Note the minimal desire to cash out of equities on the heels of the big gains, with the VIX fear gauge on the retreat despite the modest market losses. When the sovereign with the world's most popular currency (not on a daily basis, but in the grander scheme of things) says it will buy up risk, the prudent thing to do would be to toe that line. At any rate, disappointment is unlikely to set in until some months down the road. In the meantime, there'll be some speculation.

Smith is right that the Fed has severely limited resources for directing the massive capital flows that used to be allocated by the private sector. But this may be one of those undertakings where less is more, and where 100 well-intentioned civil servants will do no worse than 10,000 lavishly paid investment bankers.