The petroleum numbers seem to be showing an interesting trend developing. Consensus estimates were fairly accurate for various forms of refined crude, but raw crude inventory continues to pile up faster than analyst predictions would indicate.

My take on this phenomenon is that the refiners have a much more keen sense of and concern for market demand and have adjusted production accordingly while crude producers who are feeling the double pinch of drastically lower prices and significant reduction in demand continue to oversupply in a desperate attempt to maintain historically abnormal levels of cashflow.

While I generally agree that artificially propping up asset prices is not a sustainable idea, I am not sure that I would agree that attempting to bring 30yr fixed conforming mortgages down to 4.5% would qualify as artificial manipulation. I also feel that the effect which 4.5% mortgage rates will have on the housing market is a topic wide open for debate with little concrete data to back it.

First let's examine the nature of 30 year fixed mortgage rates. These rates are set by the market in relation to the rates of 10yr treasury bonds. The typical spread between 10yr treasuries and conforming 30yr fixed loans is about 110 to 175 basis points. With 10 year bond rates below 3%, that would imply a 30yr fixed rate in the neighborhood of 4.25%. However, with the incredible and hopefully temporary level of extreme risk aversion in the credit markets, this spread has almost doubled.

Deflation, in my humble opinion, can be defined in one of two ways - either as a decrease in the price paid for goods and services or a decrease in the money supply. At this point in time, I believe that we are, without a doubt, seeing both.

There can be very little debate about the decline of asset, service and goods pricing. Charts of any asset class, with the exception of US Treasury bonds, all look like they have walked off of a cliff. The price of consumer goods is falling rapidly across the price spectrum as retailers from Wal-Mart (WMT) to Barney's of New York offer increasing levels of discount pricing. Durable goods prices are falling as both new and used automobiles, airplanes and other goods are no longer in sufficient demand due to economic and credit market conditions. The Baltic Dry Index has taken an unprecedented tumble.

Blackrock recently suggested that the US Treasury should offer a 100 year bond which offers "steady payment of interest and principle over the last 50 years."

In my opinion, Blackrock just suggested the framework for the ultimate free injection of liquidity back onto the treasury balance sheet. While analysis of such a theoretical bond structure by its very nature is speculative, the purposes behind the framework seem all too clear. Allow the governemnt to borrow at discounted rates and with no guarantee of or restriction from repayment, followed by a 50 year bond of conventional structure which can be fixed or floating rate. Britain still floats some WWI debt this way.

The dollar is staying stable against other hard currencies (appreciating against the pound and euro but deteriorating against the yen) and commodity prices continue to fall. Energy (oil, natural gas, etc.) construction materials (steel, lumber, etc.) and food (grains, soy, meat, etc.) are all demand driven precious metals tend to be a hedge against inflation. All of these assets are continuing their recent downward trend, as global deleveraging continues everywhere outside of the Federal Reserve's balance sheet. With the precious metal prices not holding up, more deflation is being priced in and appears to be creating a self fulfilling prophecy.

It seems very clear that the current brain trust has the means and will to inflate out of this by printing unprecedented amounts of dollars while artificially holding down long term rates via the use of the Fed's balance sheet, which has now become a black box. It is also apparent that no other nation sees it as being in their best interest to challenge the plan, as all stand to benefit from its success or feel unbearable pain from the collapse of the US economy - which is the only alternative outcome.

While the artificial nature and blatant bull-biased market manipulation and resulting historic short squeeze caused by the short sale ban are disturbing and in my opinion bad for the market there is one serious upside to this bit of government intervention. The upside lies in the ability of traders to once again use fundamental analysis and re-enter the most promising short ideas once the dust settles October 2nd.

In my opinion, the short ban was necessary in order to prevent record VIX and a market ripe for manipulation during the unveiling of the banking bailout. Simply put the government feels that the market cannot be trusted to keep from tearing itself apart during the despair phase of this contraction.