The Core Inflation Lobby

There is a dividing line between supporters of the so-called
Core rate of inflation and those economists I taken to referring as “reality
based.” Perhaps the distinction is nothing more than people merely “talking
their books.” One’s views on inflation are likely to be affected by your
particular portfolio holdings (or those of your firm and/or its clients). Long
only equity funds have been begging vociferously for the Fed to stop
tightening; Market Neutral funds (long/short as well as Arb or Option funds)
don’t seem to care much either way.

Then there’s fixed income players. PIMco’s Bill Gross,
the world’s largest Bond portfolio manager, is the 2nd person to suggest that
rate cuts – not hikes, but cuts – are likely to occur in 2006. Given the
vulnerability of Fixed Income to even more rate hikes, one can understand his
perspective. Incidentally, we were actually the first to suggest 2006 rate cuts
– back in June of this year in the WSJ.

Then, there are the political economists. They end up seeing
the Economy through the prism of their political views. Instead of talking
their positions, they talk the books of those they support politically.

Which brings us to the Bernanke announcement. There is no
doubt he is eminently qualified; You know a nominee is a "slamdunk"
to get through the Senate Confirmation Process when political cartoonists mock
the President for nominating someone who’s too qualified. The only critique against Bernanke is that he is not Hawkish enough against
inflation.

And that belief is the most likely explanation for Monday’s
moon-shot. Was yesterday’s celebratory stock launch a rational assessment of
the nominee as qualified? Or was it more likely that the market likes the idea
of less vigilance against inflation? As noted above, those who have been “long
and wrong” have made the basis of their vigorous Fed lobbying the transparently
false claim there is no inflation ex-Energy, despite the fact that nearly
everything we purchase has gone higher (even Broadway!). These souls have been begging the Fed to end their
misery by declaring “Mission Accomplished” on inflation; With the war now won,
they are hoping the armistice will consist of “no more rate hikes.” As our
favorite commentator observed, this also “bespeaks the market’s relentless
demand for instant gratification.”

The Majority doesn’t always rule.

As the table at top shows, all the major indices were up at
least 1.6 and as much as 2.2%. The fly in the ointment has been the modest
volume – its slipped 4 straight days. On Monday, we traded 213million less shares
than Friday. That suggests modest conviction.

This “air pocket” is hardly what
the Bulls need to support a lasting move higher.