Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1406.8	9.7	0.69%
Eurostoxx Index	2438.5	34.7	1.44%
Oil (WTI)	95.29	0.7	0.71%
LIBOR	0.418	-0.003	-0.59%
US Dollar Index (DXY)	81.21	-0.486	-0.59%
10 Year Govt Bond Yield	1.65%	0.02%
RPX Composite Real Estate Index	192.1	-1.0

Markets are shrugging off a lousy NAPM Milwaukee report ahead of The Bernank's speech, which is scheduled for 10:00am EST.  Given this is the last day of the month before a long weekend, there will probably be a flurry of activity during the speech and then the Street will be on the LIE by noon. Bonds and MBS are down slightly

While the general feeling is that Bernake will not say anything earth-shattering (he prefers to announce policy during FOMC statements) people are looking for clues regarding further QE.  Numerous sources have indicated that trading desks are long bonds going into the speech, so there is room for disappointment, or a "buy the rumor, sell the fact" reaction. The next FOMC meeting is in 3 weeks, and that should be the end of anything major out of the Fed until after the election.

Jim Grant has an op-ed in today's Washington Post discussing the gold standard. FWIW I think the latest political re-consideration of the gold standard is more of a political attempt to keep Libertarians in the tent. He does make a good point that the dual mandate is probably asking the Fed to do too much.  As he puts it: "Positively out of bounds for the chariman of the Federal Reserve is the admission that he is in the wrong line of work.  The institution he leads was created to conduct a central banking business. But Congress and he have steered it into the central planning business. In so doing, the Fed has exchanged a job it could do for one it can't." And let's be honest - the Fed sets prices (interest rates) the same way the Communist Bureaus of the USSR used to set the price of gasoline.

As I was driving into work this morning, Meredith Whitney and James Bullard (St Louis Fed Head) were debating ZIRP. Bullard made a comment (and I am paraphrasing) "Some people think the Fed kept interest rates too low for too long in the early 00s - that's been sort of an ongoing debate.  The people who disagree would point to the fact that inflation didn't shoot up. The problem with the policy came in other ways with the financial crisis which no one could see coming. I do worry about people reaching for yield and taking too much risk"  No mention of the housing bubble.  No mention of the stock market bubble.  And Bullard is a supposed inflation hawk.  The Fed thinks it has nothing to do with creating asset bubbles.

Stephen Roach (ex-Morgan Stanley, now at Yale) makes this exact point when he says that Bernake should not be re-appointed. Meredith Whitney (same link as above) made the point that ZIRP has made it extremely difficult for banks to make money in their traditional business (lending) so they are taking more proprietary bets (either directly or indirectly through over / underweighting different asset classes).  Not to mention that it is annihilating pension funds (the next crisis on the horizon) and retirees are cutting back consumption because of meager earnings on their assets. Contrary to the belief in Washington, there are unintended consequences that are working against what they want to achieve (more lending, more spending, less risk). ZIRP is not "free."

If Romney wins, it is possible we could get a break from the Greenspan / Bernake Fed, which may well be the final nail in the 30 year Treasury Bull Market's coffin. If that happens, in a couple of years, the financial press will learn another buzzword they don't understand - convexity risk. Which some mortgage REITs aren't hedging.