FROM THE FED'S LAST GOVERNOR

"This is an extraordinary period and temporary actions must be taken, especially to assuage the angst of a very substantial part of our population. So I don't actually consider those types of actions stimulus programs." - Alan Greenspan, October 4, 2009

Mr. Greenspan, allegedly one of the most successful or at least astute central bankers of all time was talking to ABC's "This Week" on Sunday and was referring in the comment above to an extension of unemployment benefits.

The interview came two days after the government announced an increase in the rate of unemployment to 9.8% as more jobs than expected were shed during September. The news was initially taken badly thanks in large part to an overly optimistic expectation that the pace of job cuts might diminish.

Truth is though that no one ever promised to stop laying off workers. The worst of the layoffs came during January when about 750,000 workers lost their jobs. Since then things have calmed, but as just about everyone is primed for, including us, the U.S. is heading for a 10%-plus rate in 2009.

The selling in stocks therefore abated mid-Friday morning. At the same time bond prices stopped rising. Put another way, yields stopped dropping on the back of data weakness. One reason that we'd offer to support this perspective is that investors can see that although the report may have been dour, the recovery continues. The fact that it's at a slow pace is not necessarily the point her - the fact is that the economy continues to put space between it and the frozen tundra of 2008.

Now, back to Mr. Greenspan's views in which he also illustrated a very important point. That is that only around less than half of the $787 billion stimulus is currently employed. When asked whether he thought there would be further stimulus his answer was the following.

"Only 40 percent of the first stimulus has been in place. And there is a considerable debate going on in the economics profession about how effective this stimulus package is," he said. "So in my judgment, it's far better to wait and see how this momentum that has already begun to develop in the economy carries forward."

His initial point is rather important. It points out that around $315 billion has so far been put to work and that $472 billion thus far has not in attempting to get the economy back on track. And so for anyone concerned about the fact that Friday's job losses represent the zenith of the government's various stimulus programs, think again. Not only is this not the case, but the fact remains that there is plenty in reserve.

Mr. Greenspan's follow-up comment that there is no need to continue stimulating over and above what's already there is likely to fall short of political ambitions. With 2010 elections painfully close, all politicians will be going back cap in hand to their constituencies faced with a higher rate of unemployment than when they last promised them the earth. Some backlash is likely and the promise of further stimulus - regardless of what may be in reserve - is a strong likelihood. And the sooner it is implemented the better.

We expect to see stocks continue to rally this week, the dollar will likely weaken while bond yields will probably start to take back some of what they took this week.

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