Notes From Underground: This week’s main events-elections, FOMC, unemployment

The slew of U.S. data has been a mixed result. The personal spending and earnings number were both soft, while the PMI manufacturing number was better than anticipated. Equity markets shrugged off the weaker data as the market closed higher, although far off the early highs in the S&Ps and even traded lower late in the day.

The market is anticipating a Congressional change of power, which will result in a compromise on taxes and may even mean that the dividend and capital gains taxes will remain as they are now. Also, the regulatory juggernaut that is the Obama administration will be halted and the types of moves made by the EPA on ETHANOL will be curtailed. Late in the day there was a WSJ post from former FED VICE CHAIRMAN Don Kohn discussing the benefits and costs of going ahead with QE2. Kohn is very forthright in his views that QE will do some good but a robust discussion on the issue is needed at the FED.

The former FED GOVERNOR makes it clear that the increased asset prices that will result are a good thing, but the rapid rise in global commodity prices could be problematic. The finality of the piece is that KOHN is an output-gap proponent and as long as unemployment remains high, the FED has to err on the side of fighting DEFLATION. It is clear that the former confidant of Greenspan and the mainstay of the FED for 30-plus years believes that there is an assymetric battle on the deflation/inflation front. The FED believes it is much easier to stem the rise of inflation rather than to curb the viciousness of the DEFLATIONARY BEAST. The Japanese experience is embedded in the psyches of the FED establishment. The only issue then is how much will be needed and will BEN BERNANKE compromise with his board or will he proceed full speed ahead?

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3 Responses to “Notes From Underground: This week’s main events-elections, FOMC, unemployment”

  1. Fred E. Says:

    “The former FED GOVERNOR makes it clear that the increased asset prices that will result are a good thing, but the rapid rise in global commodity prices could be problematic. ”
    These guys never learn. Increased asset prices are a good thing if they are based on FUNDAMENTALS, and a bad thing if they are a result of the monetary printing press. See dot com, followed by an 80% decline in the S&P, housing price levitation followed by the crisis we now find ourselves. Greenspan, Bernanke and Kohn, birds of a feather that have brought us to our sorry state.

  2. Fred E. Says:

    Correction- 80% decline in NASDAQ, not S&P.

  3. yra Says:

    Fred,we have some Hallelijahs from the chorus of those who think outside their models–and Kohn is the voice of reason within the FED

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