When I was a child I could never sit still on a long road journey. I was always asking, “Are we there yet? Are we there yet? ARE WE THERE YET???” My father would always reply “Nearly, son… Nearly,” even though we were still miles from our destination.

This is exactly how the financial markets seem to me right now. It’s been more than two years since the credit crisis kicked off, and I’m getting itchy in my seat: I want to be back out there playing with the other financial (whizz) kids. But it feels like the end of this current rocky road is still on the distant horizon.

Wall Street wants you to believe things improving… that we are on the road to recovery… and that “green shoots” are starting to appear in the economy. Call me a cynic, but I’m just not convinced.

Wednesday’s central bank actions on both sides of the pond signal that we are NOT there yet. In the US, the Fed left its interest rates on hold… and dangerously close to the zero bound. And it announced that it expected economic activity to remain weak for “some time.” The Fed is also continuing with the $300 billion Treasury repurchase plan (its massive and highly experimental money printing operation).

Meanwhile, the European Central Bank launched its first ever 12-month loan auction (at the 1% benchmark rate). This will pump a whopping €442 billion into the banking system.

With the credit markets still broken, the European banks snapped up the funds. Over 1,000 banks took part. It’s no wonder. Who would say no to a 12-month loan at just 1% when you can lend to Joe Public at over 10%? There’s an arbitrage trade I’d like a piece of… in any market.

To be a true contrarian there has to be a consensus view. And at the moment, market participants are all pulling in different directions. The ‘experts’ are busy trying to call the end to the slowdown. And they’re hoping it sticks. Meanwhile, the the Fed and the Treasury continue to hose the economy down with extra liquidity. This is a brave new world. And an extremely dangerous one for rookie investors or investors reaching retirement or who are already retired – one false move in this type of market could prove fatal.

The Fed’s recent policy message should have resulted in a stock market rally. Bernanke & Co hinted at the much anticipated return to inflation (“the prices of energy and commodities have risen of late”) but then washed all the momentum out of this trade by saying “the Committee expects that inflation will remain subdued for some time”.

Markets hate nothing more than uncertainty. And until we have a more harmonious voice either direction from governments and policymakers this turmoil is going to continue. So I’m burying that impatient kid in me for now and sticking to the safe stuff. And so should you: stick to cash, gold and investment grade fixed income for now.

“Investors increase bets on US rate rise.”

Anticipating a rise in rates, rather than another cut, investors sold gold, bonds, and oil. The black goo lost $4 a barrel. Gold got slammed for a $23 loss, while yields on 10-year Treasury Notes rose over 4% (yields rise as prices fall).

Why would the Fed put rates up? Ah…that’s our story for today. It’s a story of numbskullery, tomfoolery, and chicanery…of vigilantes and blazing saddles…of war and forgetting. In short…it’s a typical financial tale, where nothing goes as hoped for…and everything goes as it should.

Let us back up.

Last year, we were writing about a ‘battle’ between inflation and deflation. The markets were deflating…but the feds were inflating. Who was going to win?

Actually, it was a mixed-up, woebegone war…with casualties all over the place and the average American household caught in the crossfire. The poor lumpenconsumer has been taking incoming from both sides for more than a year. His house sustained a direct hit from deflation. Then, his income got whacked by shrapnel from the dollar’s blowup.

Meanwhile, inflation blasts him with higher costs for just about everything – notably the essentials, fuel and food. What can he do but keep his head down?

And pity the poor guy who was lured out to a distant, new suburb by a big, new house with a big subprime mortgage! Now, he’s got to pay $4 a gallon to drive to work, while his house payment goes up and his house value goes down.

Naturally, the feds rushed to help the guy. His real problem was that he had too much credit…but didn’t stop them; they tried to give him more.

Still, when a bubble pops, it is almost impossible to pump it up again.

Henry Kissinger explains why in today’s International Herald Tribune :

“…the role of speculative capital has magnified. For speculative capital, nimbleness is the essential attribute. Rushing in when it sees and opportunity and heading for the exit at the first sign of trouble…”

Speculative capital is what the Feds create when they lend money below the inflation rate. It does not go out and invest in long term projects like steel mills. Instead, it looks for the hot, rising market…the one that will give it a quick payoff. The guy with the big house and the subprime mortgage was not really buying a house…he never paid for it. He was just speculating.

And now his speculation has gone bad…and all the Fed’s hot air goes into a new bubble. When the tech stock bubble popped, for example, the next big thing was a bubble in housing and housing-related debt. When the housing and subprime bubbles popped we guessed that the authorities would pump hard to try to reflate them…but that the Fed’s inflation would go into new bubbles – in commodities, oil, and gold. So far, so good. Oil slid up past $135. Gold shot up over $1,000. And food? Food prices are so high they’ve set off riots all over the world. The OECD says high food prices are here to stay. And farmers in Argentina are setting up roadblocks, again, to try to starve the capital into submission.

Getting back to oil…British truckers clogged up London earlier this week, demanding relief from high fuel taxes; truckers in Marseille shoved against riot police…again, complaining about the high cost of diesel fuel, which is running about $9 a gallon in France. We’re pleased to report than no mobs are forming to demand cheaper gold…but surely some bubble is in the yellow metal is bound to inflate sooner or later.

At the heart of the discontent is a very new, very disturbing, and very predictable fact: these new bubbles are not nearly as nice as the old ones.

*** The bubble in residential property made people feel good. They thought they were wealthy and thought they could ‘take out’ a little of that wealth and spend it. A bubble in oil is an entirely different matter. It makes people feel poorer every time they fill up their gas tank. And it forces them to cut back on spending rather than increase it.

Earlier this week we reported an historic downturn in Americans’ driving habits. For the first time since the ’40s, they’re seeing considerably less of the U.S.A. in their Chevrolets. This morning, comes this headline from Bloomberg:

“Sears posts net loss as consumers slow spending on clothing.”

They’re spending less on imports too – bringing the U.S. trade deficit to a 5-year low.

Remarkably, despite these huge victories for the forces of deflation, the U.S. economy is still growing and the stock market is not falling apart. The latest numbers from Washington tell us that GDP grew 0.9% in the last quarter, rather than the 0.6% previously reported. Knowing how the Labor Department suborns its numbers, however, we would want a good cross-examination before we believe them.

After the Fed intervened to save Bear Stearns, it looked for a while as if they had done the trick – as if they had succeeded in re-inflating the bubble in the financial industry. After the panic, the bank index rallied 22%. But now it’s given up almost all that gain. Banks are about 40% down from their high…amid talk of more pain and suffering in the industry. Wall Street, for example, said it had more layoffs coming later in the year.