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Yellen Throws Sinking Market an Anchor – Ep. 141

  • Janet Yellen was up on the Hill today for the first of her two-day testimony before Congress
  • Remember I said the only way that Janet Yellen could stop the market from falling is to admit that the Fed will alter its 4-rate-hike trajectory for 2016, and she didn’t do that
  • As a result, the stock market failed to sustain its early morning gains; the Dow was up better than 100 points – closed near the low of the day down 99.64
  • The NASDAQ, which was up not quite 100 points earlier in the day closed on the low of the day, up only about 14 points on the day
  • It was the opposite for gold; gold was actually down this morning before Yellen spoke, down around 1180-ish on the lows; we closed up $8 on the high of the day – $1197 – knocking on the door of $1200
  • The gold stocks were clobbered this morning and they closed positive; the gold index was up about 2-2-1/2% – it was down 4% earlier when gold was down but by the stock market opened gold wasn’t down $8 anymore, it was down about $2 or $3, yet gold stocks were clobbered
  • Maybe it’s still the overhang from Goldman Sachs coming out yesterday and predicting that gold would fall below $1000/oz in 2016
  • That probably means that Goldman Sachs is short a bunch of gold and they want to cover, or they just need to buy and they’re trying to convince the muppets who actually pay attention to what they say, to sell their gold to them
  • Janet Yellen continued with the narrative that everything is O.K. – the economy is fine, the recovery is on track, yes, she acknowledged some headwinds: growth was a little bit slower at the end of last year, but no big deal
  • There are some problems overseas that they’re monitoring , there are some financial tightening: overseas markets are weak, domestic markets are weak, yes the Fed is paying attention to all that
  • But so far, from their perspective, everything is on track, the recovery is moving along, the labor market is strong, despite the fact that there is no improvement in labor force participation, there’s no improvement in the part-time workers who want full-time work, there’s no real wage growth other than the bump from the minimum wage hike
  • But despite all that, Janet Yellen still maintains that everything looks good, that we will overcome these headwinds – this is her most likely scenario
  • She did acknowledge that monetary policy is not fixed, that the trajectory is not set in stone, that the Fed will monitor incoming data, and if the data evolves in a manner they don’t expect, then yes, they might not raise interest rates as much as they believe they’re going to raise them
  • As far as the Fed is concerned, based on the data they have now, their most likely scenario is that everything is fine, which means the market is going to keep falling
  • It’s almost ironic that Yellen would say, “The markets are weak, and if they stay weak then we might have to adjust our monetary policy” – that means the markets are going to stay weak!
  • The only way to stop the markets from falling is for the markets to know that rates aren’t going up
  • I think it’s more than just the absence of rate hikes: this market needs more QE
  • The Fed dialed back the dosage and the market requires it now, or it will start going down
  • I was watching a great interview with Jim Grant today on CNBC and he was saying all the things I am saying: he says we’re already in a recession; he’s confident that it began at the end of last year and he thinks the Fed is going to go back to zero and do more QE, and that they might go negative
  • Janet Yellen was asked about negative rates in her testimony, apparently the Fed had considered it back in 2010 and they rejected it and she was asked if negative interest rates are even legal
  • Yellen said to her knowledge there is nothing legally preventing the Fed from going to negative rates
  • But, of course, the fact that the Fed is considering it and talking about it means that they are going to do it
  • If they weren’t going to do it, they would reject it out if hand, because it is horrible
  • Do you think negative rates are working in Europe? They’re not working in Japan they don’t work anywhere
  • It’s a desperate attempt to try to lower rates once you’ve gotten to zero
  • Yellen was asked if we do have a recession, while rates are so low, how do you lower them?
  • One of her answers was, “We can lower rates with forward guidance.”
  • In other words, we bring rates down to zero and say that we are going to keep them there forever and that’s an additional stimulus because the markets won’t worry that rates might go up
  • We’ve already had that – that’s not going to do anything
  • All of this positive talk from Janet Yellen is exactly what the market doesn’t want to hear
  • As much as some people want to pretend that the rate hikes have nothing to do with this market sell-off, they have everything to do with the market sell-off
  • Cheap money was the only reason the markets went up in the first place
  • You can’t pull the table out from under the cloth and expect the cloth and the dishes to remain levitated in mid-air
  • One of the things that Janet Yellen said to Congress, in describing the Fed’s mission, she said she had a dual mandate:
  • To maintain maximum employment and two maintain 2% inflation
  • Where did that mandate come from?
  • The Fed’s actual mandate is to maintain price stability. Janet Yellen has taken it upon herself, like an executive order to define price stability as 2% inflation
  • That is the opposite of price stability – that’s rising prices
  • If Janet Yellen really believes her mission is to maintain 2% inflation, then her mission is to prevent price stability and no one says anything about this
  • One of the most interesting aspect of the Q&A was the questions she was receiving from the African American members of Congress
  • Every one asked what she was going to do to help African Americans – not the country
  • Most questions were about the higher rates of unemployment experienced by African Americans and if the Fed would consider the plight of particularly African American males, when making monetary policy
  • How can she possibly target one group over another with monetary policy?
  • All the Fed does is print money: they lower interest rates, they raise interest rates, they buy bonds, they sell bonds, they expand the balance sheet, they contract it. That’s what they do.
  • One African American Congressman expressed concern that there were no African American Fed presidents
  • He said how can the African American community be represented if they don’t have a seat at the table
  • Would a black banker make different decisions than a white banker? Think about how racist a statement like that is: in order benefit Blacks, you have to be black yourself? Can a black banker only benefit blacks and not whites?  This is nonsense
  • When Janet Yellen was appointed there were comments about how a woman at that job would be a change for the positive.  To believe that her decisions are going to be better because she is a woman is sexist
  • None of that is going to change the unemployment rate in African American communities. Congress is responsible for the problems of inequality in our economy
  • I am not saying the Fed is not responsible for unemployment in general.  The have diverted resources that would otherwise grow the real economy to prop up bubbles and Wall Street
  • Yes that is starving Main Street of credit and resources and so, overall that hurts jobs, but that is not the reason that economic problems are felt disproportionately by young black males. That is 100% the result of government.
  • Janet Yellen also said it was the Fed’s job to make sure there is a job for everybody who wants one
  • How is the Fed going to do that?
  • The Fed is supposed to maintain the purchasing power of the currency
  • Politicians are trying to get the Fed to do all sorts of things that shouldn’t be done by the Fed at all
  • Keynesians would throw a bunch of stimulus at the problem, but because we’re already broke, we can’t borrow any more money so they are leaning on the Central Bankers and all they do is make it worse
  • That’s what’s going on in Japan and Europe
  • These governments have run out of other people’s money and they pass the baton on to the Central Banks
  • What really needs to be done is to cut federal spending
  • Speaking of buying votes, I want to address Bernie Sanders victory speech
  • This illustrates why the Founding Fathers hated democracy so much
  • They wrote the Constitution to protect us from the evils of Democracy
  • It all boils down to, “Vote for me and I will steal for you”.
  • We’re going to take all the money from the rich people who don’t deserve it and give it to you, the people who vote for me
  • The reason there is such fertile ground for a guy like Sanders is because the economy is a mess, and when the Obama talks about how great everything is, it makes the voters who are suffering mad, and they are driven to Sanders and Trump, who actually say things are terrible