THURSDAY JANUARY 21, 2010

Forced Exit Strategy

This blog has discussed the need for the Federal Reserve to articulate an exit strategy for its easy money policy.  It has also discussed the need for the Federal government to show some signs that its massive spending will subside.  Both the Fed and Washington seemed to be tone deaf to the market's concern.  Well, this week, exit strategies were forced upon both.

The election of Scott Brown in Massachusetts is essentially a forced exit from the massive spending in Washington.  Despite what the political pundits say, Washington's spending binge was a major focus of the campaign.  By losing its super majority, the ability for the Senate to pass grand spending programs became more difficult, both from a parliamentary and political stand point.  Instant exit strategy.  This should be good news, particularly for bonds.

Yesterday, the People's Republic of China established an exit strategy for the Federal Reserve.  China announced the its GDP rose 10.7% over the last year.  This report was stronger than estimates and has stroked fears of yet another bubble.  China has responded by placing restrictions on its bank's ability to lend.  This led to equity market declines across the globe, especially in the commodity and other economically sensitive stocks.  China is the engine of growth in the world economy, and if the government begins to "take the punch bowl away,"  the rest of the world's economies may suffer as well.  By indicating a tighter monetary policy stance, China has preempted the Fed's exit strategy. 

POSTED AT 1899-12-30 08:29:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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