Stocks | - Part 2

Yellen on Capitol Hill

Financial markets appear to like what Federal Reserve Chair Janet Yellen has said so far in her appearance before the congressional Joint Economic Committee up on Capitol Hill.

A short time ago she was asked about this Wall Street Journal op-ed by Fed historian Allan Meltzer How the Fed Fuels the Coming Inflation and, while responding, she objected  to the term “goosing” when referring to the effect monetary policy has had on the stock market.

The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money—and in a reckless fashion—for years.

The relationship between Fed money printing and growing inequality in the U.S. was also brought up in this interchange and Ms. Yellen didn’t acquit herself particularly well, offering up the usual “trickle down” theory of boosting the economy without calling it such.

Senator Bernie Sanders (I-VT) just asked her whether we’ve transformed into an oligarchy of some kind with Fed policy only making this situation worse and she similarly didn’t have anything very useful to say. Yellen just admitted that Fed forecasts are just “guesses”, a word she stumbled over twice before finally getting it out, and she clearly seems to be most comfortable talking about such things as the intricacies of the labor force participation rate rather than much weightier questions about the effect of central bank policy.

I haven’t watched one of these in some time (and not one of Yellen’s prior appearances) – it’s all quite fascinating and, for once, lawmakers are asking some interesting questions.

For some reason, Wall Street seems to just love what she’s saying.


The financial media is atwitter (in what is either a poor or ironic word choice, depending on your point of view, given the share price tumble of one microblogging platform yesterday) about today’s big news out of the technology sector – the Alibab IPO filing.

The Chinese company that is responsible for the bulk of online commerce in a nation with over a billion people submitted plans today to offer shares to the public in a deal that could be worth upwards of $200 billion after shunning the Middle Kingdom in favor of Wall Street where there is renewed hope for stumbling technology stocks.

Yahoo! will be the prime U.S. beneficiary of the IPO as their 2005 investment in the company required them to sell a portion of their holdings if/when Alibaba went public and the company’s founders will maintain almost complete control, Jack Ma providing this interesting letter to employees that was translated in this item at the Wall Street Journal.

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Still Dancing in 2014

I feel compelled to pass along these comments from Doug Noland’s latest Credit Bubble Bulletin and, while reading them, it might be useful to recall what Mark Twain once said about history rarely repeating, but often rhyming (or something like that).

Throughout the financial markets, Bubble excess seems to turn more conspicuous by the week. From star hedge fund manager David Einhorn: “There is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.” Obvious Bubble excess in the Credit market also garners increased attention. Bloomberg quoted Apollo Global Management co-founder Marc Rowan from this week’s Milken Institute Global Conference: “All the danger signs are there of a future crisis. We’re back to doing exactly the same things that were done in the credit markets during the crisis.”

It’s been my view that a going on six-year old “global government finance Bubble” last year suffered its first subprime-like cracks (EM and China). It’s worth recalling Citigroup CEO Chuck Prince’s infamous quote from July 2007 (via the FT): “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Why was Mr. Prince – and about everyone else – still dancing in the summer of 2007 – when it seemed rather clear the environment was in the process of changing? Because there was so much money to be made. Because the cautious were being left in the dust. Because it seemed irrational not to be participating in one of the most lucrative financial backdrops ever. Because not participating in the industry boom was career jeopardizing. Because, as Keynes noted a long time ago, if you’re going to be wrong you’d better be wrong right along with the group. The exuberant Crowd had convinced themselves that the Fed had everything under control (“Would never allow a housing bust!”)

Of course, Fed chief Janet Yellen will trudge up to Capitol Hill this week to answer lawmakers’ questions about the health of the U.S. economy and, in the process, she’ll probably have some soothing words for whatever currently ails financial markets, all part of what is now being called the Greenspan-Bernanke-Yellen Put (that works most of the time, but when it doesn’t, there’s hell to pay, as Ms. Yellen will learn at some point).

On the Fed’s “Automatic Stabilizer”

The closing paragraphs of Doug Noland’s latest Credit Bubble Bulletin seemed worth sharing here, not that anyone really cares about this sort of thing anymore, but just as a reminder of how far out into the deep water we have collectively been swimming.

Fed QE operations (“leveraging”) have incentivized what I believe is unprecedented leveraged speculation on a global basis. This additional leveraging has unleashed only more liquidity/purchasing power that has exacerbated inflationary distortions. I argue strongly that all this leveraging has created a deep systemic (financial markets and real economy) dependency to ongoing balance sheet growth (liquidity creation) by the Fed. It has reached the point where even zero rates, massive QE, highly speculative securities markets, pockets of overheated real estate and asset markets, and record securities values spur only modest growth in the general economy.

From Yellen: “If the public understands and expects policymakers to behave in this systematically stabilizing manner, it will tend to respond less to such developments. Monetary policy will thus have an ‘automatic stabilizer’ effect that operates through private-sector expectations.”

The traditional gold standard was so effective because it in fact provided an “automatic stabilizer.” If Credit was created in excess, an economy would suffer a loss of gold. The reduced gold reserve would dictate higher rates and a (stabilizing) contraction in lending. Bankers and politicians understood the mechanics of the system (and were committed to sustaining the monetary regime), so they would tighten their belts when excess first emerged. In this way, the gold standard for the most part provided a stabilizing and self-correcting system. These days, everyone knows the Fed will not respond to excess. Our central bank, however, will be predictably quick to print additional “money” at the first sign of a faltering Bubble, liquidity that will reward financial speculation. Excess begets excess. Today’s system is the very opposite of “automatic stabilizer.”

This all could sound too theoretical. But with the Fed intending to conclude balance sheet leveraging later in the year, this theory might soon be tested.

That highlighted passage is key – all the Fed’s work hasn’t done much for the economy.

Naturally, stocks are higher today along with bonds, real estate, and other asset classes.

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