When I hear the words "price war" it connotes pricing strategies among stores--my prices are lower shop here rather than there. Perhaps all of the retailers will have to discount deeply to just get their regular customers to shop "here".

I'm sensing more perceived caution this week over last. How funny how sentiment changes so quickly. I almost suspect that if there is some ambivalence in the employment report today, that we will see and attempt to hang a last hope on it. HOwever, with the spate of other numbers, coming next week, it would seem short lived.

In August, 2006 the Chicago Federal Reserve issued a report stating that the increase in home prices was driven by fundamentals and not by speculation or loose monetary policy:

http://www.billcara.com/archives/2006/08/maybe_us_housin.html

Today, the president of the Federal Reserve Bank of Dallas, Richard Fisher, is quoted as saying that the Fed kept interest rates too low for too long earlier this decade, fueling speculative housing activity.

Fisher: "In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today...the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the [Fed's] task of achieving...sustainable noninflationary growth."

Article from WSJ:

Fed Official Says Bad Data
Helped Fuel Rate Cuts,
Housing Speculation
By GREG IP
November 3, 2006; Page A6
In an apparent and rare in-house critique, the president of the Federal Reserve Bank of Dallas said that because of faulty inflation data, the Fed kept interest rates too low for too long earlier this decade, fueling speculative housing activity.

A number of critics have said the Fed under former chairman Alan Greenspan kept monetary policy too easy from 2003 to 2004. But Richard Fisher's remarks to the New York Association for Business Economics yesterday mark the first time some Fed watchers could recall a sitting Fed policy maker making such comments.

Mr. Fisher said from 2002 to early 2003, inflation, as measured by the price index of personal consumption expenditures (PCE) excluding food and energy, was running below 1%. That suggested that a serious shock to the economy could turn inflation to deflation, or generally falling prices. Deflation makes it much harder for the Fed to boost growth by engineering deeply negative real, that is inflation-adjusted, interest rates.

To reduce the risk of deflation, the Fed lowered its target for the Fed funds rate -- charged on overnight loans between banks -- to 1% in June 2003 and held it there until mid-2004. It has since raised it to 5.25%.

Mr. Fisher noted that subsequent revisions show PCE inflation was actually a half a percentage point higher than originally estimated. "In retrospect, the real Fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been," Mr. Fisher said.

"In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today...the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the [Fed's] task of achieving...sustainable noninflationary growth."

Mr. Fisher, who took office in April last year, said in an interview that his speech wasn't meant to be a criticism of the decisions Mr. Greenspan and the FOMC made then. He said: "I wasn't at the table at the time -- it's easy to look at things with 20-20 hindsight. The point is we need to continue to improve our ability to develop and work with better data."

Jan Hatzius, chief U.S. economist at Goldman Sachs, called Mr. Fisher's remarks "pretty striking," while noting it is Mr. Fisher's style to be opinionated. He added that while he agrees the Fed's policy from 2002 to 2004 fueled speculative housing-bubble activity, it was still reasonable "knowing what you knew at the time. You take out some insurance against a really bad, low-probability outcome, and after the fact you regret having paid the insurance premium."

Mr. Fisher said inflation, at about 2.5% now, is still higher than his "comfort zone," but it is possible it "has peaked and is finally heading lower."

Fed governor Susan Bies echoed that sentiment in a speech to Drake University in Des Moines, Iowa, saying, "inflation appears poised to decelerate in coming months... but the risks to that outlook seem tilted toward the upside."

In October, 2006, Greenspan gave his own excuse:

“I don't think that the boom came from a 1 per cent Fed funds rate or from the Fed's easing. It came from the collapse of the Berlin Wall,� Mr Greenspan told a private audience in Canada on Friday.

http://www.ft.com/cms/s/8e5e3ad6-57b9-11db-be9f-0000779e2340.html

Let me get this straight...

They blame it on 'bad data'?
They blame it on 'the Berlin Wall'???

Talk about straw horses..

THEY design the data, THEY interpret the data, THEY make the decisions ... so isn't it just possible that it is 'THEY' who have created the current woes in the US?

But no! That's not possible - CB'ers are omnipotent and omniscient beings - maestro's who never hit a wrong note.

T'man-

This is an interesting reaction to news that could have been spun. Am I seeing mood change here? It would be very odd for the markets to be in the red 6 days in a row....

MarkM

Market is nervous ahead of elections...

And technially S&P's need to hold 1360ish

Otherwise a break of the uptrend will be clear on everyone's charts - and there could be heavy selling.

Oil as usual is the wildcard.

If 1360ish holds - I expect a swing back up as shorters will cover for the weekend.

I think the level is 1362 as you and I discussed yesterday.

I am not expecting a stampede but I am impressed that we are in the red.

I will be shocked beyong belief if MONDAY was a down day. But then again, I never believed the "Markets are okay with the Dems taking the House" spin. If my political science classes didn't fail me THE AGENDA is set in the House. Some of that agenda is clearly not market friendly, as you have pointed out.

Good trading you and all.

IMO this is a 'before the election shakeout'

The market often runs down prior to and then rallies up after the election - its only natural.
Doesn't matter who wins.
They try for that "Isn't Democracy great" rally.

I think there is a 'fear rally' in golds and oils before the election.

I will be unloading this 'fear trade' and loading up on whatever was rallying in Sep/Oct for a ST bounce after the election.

This is just a short term ploy - not a cycle/market turn trade.

good trading.

BOND REPORT
Treasurys tumble as jobs data erase rate-cut hopes
The latest ISM services sector also shows a stronger than expected economy
By Leslie Wines, MarketWatch
Last Update: 12:56 PM ET Nov 3, 2006

http://tinyurl.com/tff9c

This is troubling if you embrace the economic theory that full employment and increased inflation go together hand-in-hand.

http://tinyurl.com/ylsdwh

If the current trends continue, the political party winning the US mid-term elections may be in for a rough period of political/economic transition. They might be accused of causing the ensuing economic upheaval - if it occurs. The US electorate have such short memories.

Follow up on Oratier.....all eyes should be on the bond market right now. 30 year yield at parity with the 2-year and on course to go below the 2-year yield. Not good for the bankers.

-BG

So what happens if the yield uninverts?

The S&P 500 at 1500 thats what... and everyone is happy for Xmas.

I don't discount this - strange things happen sometimes.

ALOHA !!

Where do all the political elites go when its time to cash in their chips? Now it becomes clear why there is no need to regulate hedge funds!

READ ON:
For The Time Capsule

Reuters today:
Former first daughter Chelsea Clinton has joined Avenue Capital Group, a $12 billion hedge fund manager whose founder has contributed to many Democratic Party campaigns, a person familiar with the matter said on Friday.

Clinton, 26, the only child of former President Bill Clinton and U.S. Sen. Hillary Rodham Clinton, has taken a post at the New York-based fund manager in an undisclosed capacity, the source said.

Clinton, who graduated from Stanford University in 2001 and studied philosophy at Oxford University, most recently worked at consultants McKinsey & Co. from 2003.

And this, from a few weeks ago:
Former U.S. Treasury Secretary John Snow was named chairman of private investment firm Cerberus Capital Management LP and Lawrence Summers, another former Treasury chief, will join hedge-fund manager D.E. Shaw & Co.

They're not stupid. Like bears perched at the best spot when the salmon are running, they know exactly where to stand: as close to the printing press as possible...

posted by The Cunning Realist at Friday, November 03, 2006