Nov 14, 2004


A lot of people believe the Fed is out of touch with the economy, too optimistic, or political but these comments from Fed Governor Gramlich seem pretty well on the spot.

Watching the markets here the rally that began in August looks like the participation phase of a longer term move that began in Mar '03. I don't think the August move took many traders by surprise and the retail participation is a force to be reckoned with. I also continue to think that strong IPO's by publicly recognized brand names will continue adding fuel to the retail psychology.

A big wild card here is U.S. interest rates. I am surprised the Fed did not signal an end to its hiking cycle. They could have done it simply saying they were going to let their past hikes work or by claiming inflation risks have ebbed. I believe that the Fed usually has better information than the markets and that their comments lead the news by about a month. We are at a delicate point here where oil rates are near there highs and have now worked off an overbought condition. Higher oil is just the tip of the iceberg as we are also approaching a point where it will become clear whether commodity price increases can be isolated or will lead to cost push inflation. The pop in bonds at the end of the week may continue for a couple of days but ultimately will be a good point to get short.

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