TGIF

Initial Jobless Claims came in at 448K versus a street consensus of 445K and a prior revised 459K (up from 456K). Continuing Claims came in at 4.645K versus a street consensus of 4,618K and a prior revised 4,663K (up from 4,646K). Chicago Fed came in at -0.7 versus a street consensus of -0.2 and a prior revised -0.44 (from -0.64).

Headlines report that initial jobless claims fell to their lowest levels in a month. If the numbers are so good, why are long-dated treasuries unchanged? Because the prior numbers were all revised higher and initial claims over 400K and continuing claims over 4,500K depict a very impaired employment situation.

Market bulls have been increasingly calling for a more hawkish tone by the Fed. Kansas City Fed president, Thomas Hoenig has been calling for the elimination of the words: "extended period" from the Feds statement on rates. TV pundit, Larry Kudlow expressed frustration over the Fed's insistence on extremely low rates in the midst of a V-shaped recovery. Mr. Kudlow ignores certain facts. Much of the recovery has been from inventory replenishment, significant stimulus and commodity prices which, until recently, were very low. Consumers have come back, but honestly, did anyone really believed that consumers would not or could not spend again. Things wear out and need replacing and there is still a large portion of populace which is gainfully employed. What we are seeing is a rebound from the depths of despair. The Dow Jones Industrial average has not yet risen to levels seen in 2001, never mind the loft peak of 14,164 reached on 10/9/07.

The Fed's Mr. Hoenig is taking a more hawkish tone not because he believes the economy is poised to roar ahead, but because he is an inflation hawk. He knows right now that the U.S. debt levels and inflation are no worse than those of our major trading partners. However, he knows that the country which is late to the inflation fighting (rate raising) game could be the one experiencing stagflation. In this environment, interest rates and sovereign fiscal responsibility can be likened to hunting with your friend in bear country. You don't need to be faster than the bear, just faster than your friend. In other words: U.S. fiscal policy and debt levels do not have to be "good" in absolute terms, just relatively better than other nations. This is not to say Mr. Hoenig is wrong.

If it is important to be ahead of the curve when fighting inflation, why doesn't the Fed at least use more hawkish language? It goes back to the Great Depression. During the mid to late 1930s, the U.S. economy experienced a rebound. Fiscal policy was tightened and the economy experienced a double dip. Mr. Bernanke is a student of the Depression. He fears a repeat of the past. He knows that the economy is still not healthy. It is better, but not healed. Think about it. The government has poured in record economic stimulus, but the recovery has been typical at best. Sure there is a nice economic fire burning, but this is like fueling a comfy camp fire with the U.S. strategic oil reserve. One would usually expect a conflagration from such stimulus and market participants are all excited about making s'mores. The one thing we have going for us is that Europe and Japan are more dysfunctional than we and China is battling its own over-stimulation problem.

I am of the opinion that economic expansions like the last two (tech and housing) are fundamentally unsustainable, as are the 5.00% unemployment rates. Maybe the Fed should heed Mr.Hoenig's advice and at least harden its language.

The Fed is getting what it wants as far as investors are concerned. Today's 7-year auction was well received. In fact, it was better than expected. This follows mediocre 2-year and 5-year auctions earlier this week. The Fed is keeping short-term rated low in part to 1) Send people farther out on the curve. If the treasury is going to borrow, it may as well lock in long term at low rates and 2) to sen investors into riskier asset classes. Some of the strength observed in the equity and credit markets and on the long end of the treasury curve is due to investors taking more risk by investing in these arenas to enhance returns. This is why they tend to sell off when market participants become concerned that a Fed tightening bias may be on the horizon.


NYU Professor Nouriel Roubini is warning that the massive amounts of sovereign debt issued is going to lead to defaults and inflation across the globe. He may have a point with Europe, but unless everyone buys gold, I think the U.S. will be a destination fro bond vigilantes, not a target.

Have a great weekend.