Some time to reflect on the FAD

2:15 and we'll know whether Bennie's helicopter has been grounded due to severe and unpredictable weather or if Bennie who lived through the excruciating 2008 Bear Stearns, Lehman Brothers and AIG and the potential collapse of the entire financial system within days and even hours, will be keen on taking early steps to avoid being behind the curve like they were in 2008.

I would think that the FAD would much rather that their meeting were held next week after the g-20 summit and have a broader bird's eye view of what is likely to happen there, but that's not reality.

There's been a lot of "talk", just the same as the last 3 meetings, that QE3 will emerge today, however there are some serious problems with that.

First of all when QE1 and QE2 took place, inflation was running around or below the "FAD's" mandate, we know what happened to inflation after both programs were started and although it was called, "transitory" it was only transitory until the programs ended. However today we are near 4% inflation y.o.y which is 1-2% higher then the Fad's mandate making initiating QE3 very difficult as it would likely drive consumers over the edge.

The other problem will be admitting that operation twist was a failure, which it has been thus far, but monetary policies take time to filter through the economy.

Also there is the political backlash as the Fad has come under increased political pressure for their interventionist policies that have failed to turn the economy around and certainly have failed to do anything for unemployment. The Fad in my opinion will need significant political over, some of that may come in the form of a deep sell-off in the market and GDP revisions providing they are lower. The recent GDP release was a bit stronger then expected so that would also make it politically challenging, even though consumer spending is what largely propped up GDP and the consumer is now tapped out, but that's too complicated of an argument to make to the majority of Congress.

Lets also not forget that the last few meetings have shown that the Fad wants Congress to know that they can only do so much and they haven't done much and instead have thrown the ball in the court of Congress to finally do something.

I expect that money supply will continue to expand, I expect some very bullish talk of what "can" be done, I wouldn't be surprised to hear an allusion to QE3 in the near future "should conditions deteriorate" which alone should goose the market temporarily. In essence, I expect a LOT of talk and very bullish sounding talk, maybe some slight modifications to policy and purchases.

I do believe with foreign bidders fleeing treasuries, there's little demand for them as Europe tries to prop itself up and sells USTs, meanwhile China will continue to make a political statement because of Congress and their bill calling China out as a currency manipulator. The Treasury is going to be issuing a LOT of debt and there don't seem to be many buyers available, at some point I think the FAD will have to step in to be that buyer of last resort, I just think the timing right now may be difficult.

This meeting has gone largely unnoticed in the wake of all that has happened in Europe, but I believe it will be one of the most significant meetings the Fad has had in a year, maybe more. The collapse of MF Global, being the 7th largest bankruptcy in the US certainly will bring Bennie back to the dry-heaving days of Lehman and he won't want to be behind the 8 ball again, however, there is probably an argument to be made for patience to see just exactly where firepower may have to be most urgently deployed if the situation worsens and the 2008 effect accelerates. I do expect a lot of pressure to be put on Congress to realize that this is no time to be planning on spending, but rather to be trying to find ways to cut debt as it may become very likely that they are called on again in the not too distant future to answer the calls of another TARP when overnight, someone a bit bigger then MF Global is on the verge of collapse.

Ultimately, I don't think the Fad can disappoint too much here and we may see a knee jerk reaction to the upside. However, remember what we have consistently observed to the degree that it is beyond random statistics, the knee jerk reaction is often the wrong reaction and it takes hours or days often for the market to digest and really discount what the Fad had to say.