Notes From Underground: What Was Learned From The Yellen Hearing

The Senate Banking Committee’s hearing for Janet Yellen’s Fed Chair nomination taught us several things:

1. The Senators should be applauded for dealing with Ms. Yellen in a dignified manner and allowing substance to prevail over theatrics. The questions were about issues of importance, and as I wrote on reading the Wednesday afternoon release of her prepared testimony, heavily oriented on the issue of the Fed’s regulatory responsibility. Yellen made it clear in her response on the issue of the FED‘s policy on deflating ASSET BUBBLES that monetary policy was too blunt an instrument.

If monetary policy is too blunt, the use of regulatory tolls can be a much more precise instrument. The three main Senate powers for more stringent financial regulation battered the nominee with questions related to MACROPRUDENTIAL TOOLS AT THE FED’S disposal. Senators Brown (OH), Vitter (LA) and Warren (MA) were on the offensive in getting Vice Chairwoman Yellen to acknowledge that the Too Big To Fail (TBTF) banks were the recipients of subsidies through the way the present system of deposit insurance rewards the large banks. Ms. Yellen noted that one of the Fed’s objectives should be to level the playing field for credit unions and community banks. Why should nonsystemic, dangerous banks pay more for deposit insurance then the TBTF banks? Senator Vitter pushed Ms. Yellen about the need to increase leverage ratios for the ultra-large banks. Senator Warren expressed her desire that greater regulation should be a top priority of the FED/FOMC, going so far as to get Yellen to admit that better Fed regulation could have diminished the banking crisis.

2. Jim Sinclair needs to invite Janet Yellen to one of his town hall meetings for the Fed chairman to be needs a tutorial on the importance of gold as a measure of central bank policies. When Yellen was asked about her view on GOLD, she responded that she is not sure of its role because she hasn’t seen a “GOOD MODEL” for determining what it means as an indicator. Bernanke and Yellen have each weighed in on the issue of GOLD and neither has voiced the answer that represents the wisdom of Chairman Paul Volcker: GOLD IS MY ENEMY. If  every central banker were to advance similar wisdom the global financial markets would be on a much sounder basis. The Chinese seem to be advancing a similar opinion as the balance sheet of its central bank continues to increase its gold holdings. Yes, gold has had a bad year as an investment but its role of a store of value during the last 13 years is unquestioned. An asset class that reflects the psychology of global investors needs to be understood by the world’s central bankers. Failure to understand gold because of flaws in your models  calls into question the reliance on theoretical models versus practical actions. Or, as the street slang goes, “money talks, models walk.”

3. Some Senators attempted to pin down Ms. Yellen on the timing of the anticipated tapering. The Vice Chairwoman of the Fed proved too battle hardened and politically astute to fall for that nonsense, but the feeling she left is that tapering will be done with a lowering of the FED‘s target for unemployment. Ms. Yellen was and is very concerned about the damage of long-term unemployment on society. More importantly, in response to a question from Senator Heitkamp (ND), Yellen accepted that the broader measures of unemployment probably remain more than 10%. This leads me to believe that if the FED ends QE it will be done with forward guidance to direct the financial markets to accept that the Fed will keep interest rates low until a much lower threshold of unemployment is reached (in which 5.5% will probably the new level). It seems that the FED will be worried about tapering and new bank regulations posing strong headwinds for the economy and will ensure the markets that overnight rates will not be rising for quite an “extended period.”

***It appears that 2014 is going to be the year of decision in Europe. Remember to order your copy of the “Rotten Heart Of Europe” so that you have a scorecard of the major players in the key decision-making positions. Reuters had a story on Thursday titled, “Bundesbank Warns Against Risks From Low Interest Rates.” The article quotes Bundesbank board members Lautenschlaeger and Dombret warning that the debt crisis is not over and that “the experience of other countries has shown that a prolonged period of low interest rates can result in price bubbles.” The Bundesbank board members acknowledged that if financial stability is in question the bank will act. This is important because it deflates the influence of all those entities admonishing Germany for being the instigator of the European financial crisis. The Bundesbank has the authority and ability to limit any stimulative policies undertaken by the ECB and Brussels policy makers. It seems that President Weidmann  of the Bundesbank can utilize regulatory tools to limit the stimulus of Mario Draghi. The resolution of the European debt crisis is not going to be as easy as the correlationists wish to believe.

***Last week the McKinsey Group issued a study which concluded that the FED‘s QE program was not responsible for boosting stock prices. McKinsey’s results were based on the historic levels of price/earnings ratio and price/book valuations. Barron’s magazine has a splendid rebut to the study by Randall Forsyth, which is a must read, but I am going to post a chart that overlays the S&Ps with the Fed’s balance sheet. The S&Ps’ pricing must be a mere coincidence when measured with the Fed’s purchases. If McKinsey is correct, then the FED should end the entire QE program tomorrow and all the worries of emerging markets and Wall Street investors have been for naught. Irrational investors in the world of efficient market theory.

S&P 500 During QE

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11 Responses to “Notes From Underground: What Was Learned From The Yellen Hearing”

  1. CHT Says:

    Mechanistically speaking QE doesn’t enter the pockets of everyday citizens, nor does it contribute to inflation in a debt laden system. But behaviourally, market participants bought into a self-reinforcing cult of belief and any behaviouralist investor/trader must acknowledge that.
    Stories drive markets, even when they’re wrong.

  2. Joe Says:

    Janet Yellen at a Jim Sinclair hosted event? That, I’d like to see. Safer bet is that Lew Lehrman becomes Vice Chair to represent that viewpoint. 🙂 I certainly won’t hold my breath expecting anyone nominated by this administration to acknowledge gold’s role in financial markets. Yellen might sport some gold to accessorize, but beyond that? Not in their DNA.

    I think there’s even a stronger chance of Elizabeth Warren reaching out to the national Cherokee Tribal Council for good financial medicine. Of course, Warren has 5 years left on her second 15 minutes of political fame, so the developing health care fiasco may not sidetrack her regulatory ambitions. Maybe she can surprise us and send in the best Harvard Medicine Folk to help her ally Dr. Zeke Emanuel with that 1/7 of the U.S. Economy that does not need help from the NY Fed bond desk. Could there also be Warren presidential aspirations? It’s only a rumor her name was floated. After all, the progressives could lock in the Native American vote which has been ignored for as long as the U.S. government has been ignoring their treaties.

  3. yra Says:

    CHT–giving rise to Keyne’s observation which all global macro traders live by—markets can remain irrational longer then you and me can remain solvent.In a zero interest rate environment every investment is a rational act and makes all markets efficient—how do you value risk—As I have argued and written in the blog for almost four years—the FED has broken the price discovery function of the debt markets and forced the “bond vigilantes” to the sidelines–markets thus remaining irrational as even Fed Governor Jeremy Stein warns of the consequences

  4. yra Says:

    Joe–in regards to Elizabeth Warren.She has become Jamie Dimon’s worst nightmare ,for had Wall Street and especially Dimon not blocked Senator Warren’s appointment to the newly created Consumer Finance Regulator,we would be hearing little from the previous Harvard Law Professor except on issues of mortgage and credit card abusive sales tactics—Now she is a force to reckon with and has genuine power—and in terms of regulating Wall Street to prevent it from socializing risk while privatizing profits,I am all for it

    • Joe Says:

      Yra: Wall Street, especially Dimon, are easy targets for any public official. There have been few, if any, capitalists on Wall St for 40 years. I still say Warren had her first 15 minutes of fame sniping at the big money banks. It was good theater, cheering her on, you go gal. Get Dennis Kucinich a sex change operation and a Harvard appointment, what’s the difference? (At least he managed a big city and doesn’t claim American Indian heritage for affirmative action benefit.) I do hope Warren holds the Senate job for longer than a Kennedy. We need to keep at least one progressive collectivist around as a reminder, and no better place for that than the only European commonwealth in the United States. Look, regarding my opinion, what else could you expect from a guy who believes that Bill Simon was the last decent Treasury Sec we’ve had?

  5. hershel h herrendorf Says:

    Yra,  I did not forget I still owe you for one book you gave my brother……. well  written piece……..Dalio   thinks  France is the next big problem next year in Europe. happy holidays

    Hershel H Herrendorf

    312 649 5815     Chicago

  6. kevinwaspi Says:

    The chart of the S&P and Fed’s balance sheet epitomizes (as the old saying goes) “A picture is worth a thousand words.” Or in the words of my old buddy Paul L. Kasriel, “I’ll skip the thousand words.”

  7. Chicken Says:

    JPM broke out to the upside today so long live TBTF, apparently!

  8. Notes From Underground: What Was Learned From The Yellen Hearing :: Jim Sinclair's Mineset Says:

    […] More… […]

  9. yra Says:

    Chicken–good point on JPM but I can find better and smaller based financials without the threat of a regulatory based squeeze

  10. Chicken Says:

    Agree to a large degree. How ironic shareholders are punished ahead/instead of the criminals. On the other hand financials like FMAR apparently have yet to obtain their self-appointed licenses to steal.

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