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zugzwang

Is Janet Yellen More Dangerous Than Greenspan Or Bernanke?

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Fantastic post by the brilliant Mr David Stockman.

The market is 'nuts' claims Janet Yellen, echoing Andy Haldane. Only central bankers know the true price of things...


http://wallstreetexaminer.com/2014/07/yellen-resilience-doctrine-dangerous-keynesian-blather/

Just when you thought that nothing could be worse than bubble blindness of Greenspan and Bernanke—- along comes the Yellen doctrine of “resilience”. Its dangerous Keynesian blather, and far worse than Greenspan’s feigned agnosticism which held that the Fed does not have the capacity to recognize financial bubbles in the making and should therefore mop them up after they burst. The Maestro never did say exactly what caused the massive and destructive dot-com and housing bubbles which occurred on his watch—-except that Chinese factory girls stacked 12-to-a-dorm-room apparently saved way too much RMB.

By contrast, Yellen’s primitive Keynesian mind knows exactly what causes financial bubbles. She has now militantly asserted that bubbles are entirely an irrational impulse in the private market and that the price of money and debt has absolutely nothing to do with financial stability. That’s right, if the Fed could find a way to peg the money market rate at negative 10% to further its self-defined dual mandate of just enough inflation and always more jobs—even then any speculative excesses would presumably be attributable to still another outbreak of the market’s alleged propensity for error, irrationality and greed.

Let’s see. If the central bank arranged to cause carry-traders to get paid 8% to borrow short-term money (i.e. on a negative 10% deposit rate) in order to fund the carry on junk bonds, Turkish construction loans and the Russell 2000, do ya think they might get a tad rambunctious? For crying out loud, when it comes to speculation, leverage, maturity transformation and re-hypothecation of financial assets the money market interest rates is “not nothing” as Yellen contends. Its everything!

That’s the heart of the matter and why Keynesian central banking is the most destructive and dangerous doctrine ever invented. In effect, it mandates central bankers to seize control of the single most important price in all of capitalism–the price of “carry” or gambling stakes in the financial markets—-and then asserts that this drastic pre-emption will have no impact on the behavior of speculators, traders and investors.

That predicate is so perverse that it puts one in mind of the boy who killed his parents and then threw himself on the mercy of the courts on the grounds that he was an orphan! Keynesian central bankers like Yellen are doing exactly the same thing. Pegging the money market rate at zero for seven years amounts to killing all of the financial market’s inherent stability mechanisms.

That is to say, carry trades are made essentially risk free because the money market rate is officially pegged at zero. Moreover, the Fed has further promised to be utterly transparent in notifying gamblers as to when the spread between their funding cost and their asset yield will change, and with ample advance notice.

Furthermore, the downside risk on the asset side of the trade is also substantially removed. Owing to the long-standing Greenspan/Bernanke/Yellen “put” the cost of “protection” against sharp declines in the broad market (such as the S&P 500 index) has become dirt cheap. In effect, the Fed is massively subsidizing the cost of put options that allow speculators to insulate their risk asset positions.

Accordingly, momentum deals and carry trades are far more profitable than they would be on an honest free market because in the latter case market-priced insurance premiums would eat up far more of the winnings. Needless to say, out-sized and artificial profitability attracts massive excess capital and resources into the hedge fund and trading desk gambling arenas—–the very motor forces of financial instability.

Likewise, an essential ingredient of honest two-way financial markets is speculation from the short-side. Self-evidently, ZIRP, bond market repression and the Fed’s stock market put have driven the short interest out of the casino entirely. So now we have one-way markets that are inherently prone to powerful speculative excess.

Worse still, as one-way markets gain steam they are self-evidently prone to pro-cyclical acceleration and mania buying of anything going up solely on the grounds that rising prices beget even higher prices. Clearly that is what is happening in the C-suites today where companies are consuming all of their earnings in share repurchases in order to goose their share prices by attracting even more momentum chasers into their stock.

In this context of pro-cyclical acceleration of the bubble, “price discovery” is lost entirely, fundamentals become irrelevant and the market becomes a pure gambling arena. What all of this adds up to, of course, is massive, intensifying and dangerous financial instability.

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Fantastic post by the brilliant Mr David Stockman.

The market is 'nuts' claims Janet Yellen, echoing Andy Haldane. Only central bankers know the true price of things...

There's an associated article on his own website, also from yesterday, which ties in closely with the above article. It outlines directly some of what he doesn't like about Ol’ Yeller's positon. Personally I believe she makes some sense. Fed should not care about bubbles, provided it focuses on whether banks and other large or important financial institutions can absorb the crash. Except it's difficult to accept any of them mean what they say at all. Only the other day we had this, when I don't think resiliance policy should see them taken any view at all.

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WSJ: Jun 18, 2014

When asked whether the market is trading outside of those norms, she responded: “I still don’t see that for equity prices broadly,” while adding she currently doesn’t see bubble-like conditions in the market.

I don't like a Fed (or BoE or any central bank / Treasury) that will standby, or even actively participate to their own ends, as markets are having a party - and then take measures to save chosen.

Meanwhile a chorus of VI, and weak sentimental 'victim groupies' who don't think about those who took sensible decisions or young people coming through, defending market particpants for taking on crazy positions and promoting rescue measures.

Now I have to read on other threads, that after all this, can expect my savings to be plundered and seized from the bank, and how war is coming. If either or both, then the victim groupies deserve to feel the pain the most. When I'm looking at £250,000 - £350,000 for a bog ordinary standard semi in South Manchester suburbia, in need of improvements, and then all the costs of running a home to come, and live a life and raise a family.... a lot of people have allowed it to get to these extremes over time, including many non owners with their excuses for more recent buyers as we were finally getting some softening in 2008-10, no resistance to Gov who then pursued reflation policies. (He did another interesting article the other day.) And the vast majority of VI, older owners and landlords on landlord forums, happier than ever. Even talking policies of buying as much as possible, keep no saving, and bank won't even be interested in repossessing at any point.

Some numbers for you to pick through, zugzwang. I don't see this wage-inflation, and certainly not in wider sectors aggregate.

Edited by Venger

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There's an associated article on his own website, also from yesterday, which ties in closely with the above article. It outlines directly some of what he doesn't like about Ol’ Yeller's positon. Personally I believe she makes some sense. Fed should not care about bubbles, provided it focuses on whether banks and other large or important financial institutions can absorb the crash.

Ostensibly,the CB's are there to target 2% inflation,asset if bubbles are a function of monetary policy thus they should be monitoring them.Whther they should be tragetting 2% is another matter entirely.

Here Stockman nails it..

'Furthermore, the downside risk on the asset side of the trade is also substantially removed. Owing to the long-standing Greenspan/Bernanke/Yellen “put” the cost of “protection” against sharp declines in the broad market (such as the S&P 500 index) has become dirt cheap. In effect, the Fed is massively subsidizing the cost of put options that allow speculators to insulate their risk asset positions.'

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Ostensibly,the CB's are there to target 2% inflation,asset if bubbles are a function of monetary policy thus they should be monitoring them.Whther they should be tragetting 2% is another matter entirely.

Here Stockman nails it..

'Furthermore, the downside risk on the asset side of the trade is also substantially removed. Owing to the long-standing Greenspan/Bernanke/Yellen “put” the cost of “protection” against sharp declines in the broad market (such as the S&P 500 index) has become dirt cheap. In effect, the Fed is massively subsidizing the cost of put options that allow speculators to insulate their risk asset positions.'

I'm bleeding on a (low-exposure) short/put option right now, daring to defy the Fed/central banks. Going to close out with a small loss as Dow 17000 might bring about more bull surge of new giddy madness. 'The strong economic signs support the Wall Street bulls who have pushed up the market for 1,000 days without a correction. That's the fifth longest winning streak for the S&P 500, without a 10 percent pull back, in the index's history.'

Some of her position makes sense to me, and I may be a coded message to temper markets (making banks robust to withstand shocks), but difficult to know their real position with comments about equity values, and the outcomes we've seen of many other policy.

Young (independent) people in a pincer. Tend not to risk too much of their savings (towards buying a home) in stock-markets, but equity markets ballooned last few years + crash prevented followed by massive reflation + other schemes.

Stockman: 'Dr. Yellen, of course, claims there are no financial bubbles to worry about because the Keynesian bathtub of potential GDP has not yet been filled to the brim.' http://davidstockmanscontracorner.com/california-housing/

Here’s how incredibly quiet stocks are right now
Wednesday, 2 Jul 2014 | 1:46 PM ET
It is no secret that markets have been almost eerily quiet for some time. But there's quiet—and then there's dead.
On Wednesday, the S&P 500 is trading in a mere 0.2 percent range. If that sounds small, it is. In fact, according to technician Jonathan Krinsky of MKM Partners, this range ties Dec. 30, 2013, for the title of narrowest S&P 500 range going back to 1992.
Wednesday's S&P range is also tied for fourth with Dec. 30, 2013, on the list of four narrowest ranges dating back to 1982.
The calendar certainly has something to do with it. The equity markets close at 1 p.m. on Thursday, ahead of the July Fourth holiday. The other recent day with similarly mild trading came a day before New Year's Eve.
That said, the tight range comports with a broader and much-discussed trend in 2014: declining volatility.
"It's a very frustrating situation from a traders' perspective, and not just because of less opportunities to make money," said Chicago-based trader Jim Iuorio. "Traders know that markets need to occasionally release built-up pressure in the form of a correction. When this does not happen, particularly for inorganic reasons, the pressure continues to build."
The primary "inorganic reason" Iuorio refers to is the Federal Reserve, which not only continues to dampen interest rates, but is also committed to keeping the markets calm.
Indeed, in a Wednesday lecture hosted by the International Monetary Fund, Fed Chair Janet Yellen pledged: "We will try to conduct our monetary policy, and communicate about it … in a manner that is understandable to financial markets to avoid the kind of surprises that cause jumps in interest rates, that could cause such capital flows."
It is fitting, then, that her comments coincided with one of the lowest-volatility days of the year.

http://www.cnbc.com/id/101807877

WSJ: July 1, 2014

"There's just a dearth of sellers," said Viren Chandrasoma, a managing director in equity trading at Credit Suisse Group AG. "We don't see a lot of sell orders coming across, so every buy order tends to make the market grind higher. There's not any sense of urgency, either."

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Timing the markets by anticipation is not easy without inside information, so all you can do is follow the trend with a strategy of stops and pyramiding.

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I'm bleeding on a (low-exposure) short/put option right now, daring to defy the Fed/central banks. Going to close out with a small loss as Dow 17000 might bring about more bull surge of new giddy madness. 'The strong economic signs support the Wall Street bulls who have pushed up the market for 1,000 days without a correction. That's the fifth longest winning streak for the S&P 500, without a 10 percent pull back, in the index's history.'

Some of her position makes sense to me, and I may be a coded message to temper markets (making banks robust to withstand shocks), but difficult to know their real position with comments about equity values, and the outcomes we've seen of many other policy.

Young (independent) people in a pincer. Tend not to risk too much of their savings (towards buying a home) in stock-markets, but equity markets ballooned last few years + crash prevented followed by massive reflation + other schemes.

Stockman: 'Dr. Yellen, of course, claims there are no financial bubbles to worry about because the Keynesian bathtub of potential GDP has not yet been filled to the brim.' http://davidstockmanscontracorner.com/california-housing/

Stockman is very, very smart. No-one articulates the threat of zirp and QE better than he does. It's simply astonishing that the world's central bankers can go from being supreme advocates of laissez faire and efficient markets to become believers in the command economy and prices and incomes policies. What is going on? It looks for all the world like a Chinese fire drill.

I too have been bleeding on the short side all year. Picked up a nice quick move in January but that's about all. I do a little bit of liquidity cycles work (Hurst style) which helps (I like to think) but basically I've been full-tits long for most of the last ten years. It was a racing cert that Greenspan would reinflate after the dotcom fiasco so that was a no-brainer in 2004, and I knew the UK housing bubble would implode circa 2006/7 because places like Florida were already underwater. Getting long again in 2009 was the tricky part, but after that I had the pedal hard down til the FTSE100 hit 6600 last June/July. Since then I've been mostly in cash, looking for shorting opportunities but not finding many. One set up I do like for the end of August/September is that US Treasury sales might be quite a bit heavier than expected. The US govt appears to need a LOT of quick cash to make up for the shortfall in tax receipts over the poor winter quarters. That demand could be sufficient to overwhem the Taper and induce the big boys into selling off some of their positions to cover the Treasury auctions. We'll see, but you've got to be ultra cautious in the present environment.

Edited by zugzwang

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Seems like a measured position to take. I note you August/September caution, here and on another thread of today..

Volatility has been steam-rollered by QE. QE is bullish for just about every asset class until it's curtailed (see the FTSE100 vs UK QE) - which is what the Taper has been doing, albeit glacially. August is the first real test of the Taper. Massive Treasury supply, not much free cash from the Fed to mop it up. I'll be adding to my shorts at the end of July.

Your: Only central bankers know the true price of things...

This was comments about social-media and biotech stocks. I back the idea of concentrating on rules that financial institutions have capital to absorb big shocks, but not that Central Bankers then should tell us what is and what isn't value. Although they do that with house prices all the time... "the North still not reached its 2007 value" (way over in this part of the North). It's a market.

WSJ (Today): Even stock-market darling Janet Yellen (or as the CBS News social-media team might call her: Jennifer Yellen) is waving some substantially stretched yellow flags, which seem to be capping gains as we push toward this weeks halfway point.

The idea of her (well, the Fed in a document) actually commenting on stocks didnt sit well with many.

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BREAKING: Federal Reserve chair, Janet Yellen, has passed her series 7 exam with a score of 87.

We've got ftbs happily paying £240K for a 2 bed maisonette, way into the country with long commute, with lounge in kitchen I think is only worth £75K at most.

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This does not inspire confidence;

Today, none other than Janet Yellen created yet another imaginary metric to reassure the stock-buying-public that all is well as follows: "price equity ratios and other measures are not outside of historical norms."

http://www.zerohedge.com/news/2014-07-16/janet-yellen-opens-mouth-epic-stock-market-fairly-valued-fiasco-ensues

Having a solid grasp of the lexicon matters a lot when every word you say is amplified across the globe. The correct term is 'Price earnings-not price equity.'

Not that I know the difference- but the I'm not heading up the Federal reserve either.

This clip of Yellen V Warren also does not do Yellen any favors;

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This does not inspire confidence;

http://www.zerohedge.com/news/2014-07-16/janet-yellen-opens-mouth-epic-stock-market-fairly-valued-fiasco-ensues

Having a solid grasp of the lexicon matters a lot when every word you say is amplified across the globe. The correct term is 'Price earnings-not price equity.'

Not that I know the difference- but the I'm not heading up the Federal reserve either.

This clip of Yellen V Warren also does not do Yellen any favors;

Yes, as per an article I read today, although perhaps it was just a slip-up. Markets are supposed to go up and down, and sometimes to extremes, often requiring a corrective crash. Dumb money left in isn't supposed to be rescued, assets reflated, held steady at some historic norms in the view of older vested-interests, with 'Market-Yellen' telling us what is fair value. It's for each of us to decide, not money printers making value what they want it to be.

CHAPEL HILL, N.C. (MarketWatch) — Some say the stock market’s high price-to-earnings ratio is justified by low interest rates. That seems plausible, right? Think again. There is precious little historical support for this notion.

....That is bad news for today since the stock market’s current P/E is well above the historical average. Based on trailing 12-month earnings, the S&P 500’s current P/E is 19 — 23% higher than the 15.5 average since 1871. The cyclically adjusted version of the P/E — the one championed by Nobel laureate Robert Shiller of Yale — stands at 26, which is 56% higher than the long-term average.

WSJ http://www.marketwatch.com/story/theres-a-big-hole-in-the-bull-case-for-stocks-2014-07-16

Anyway they kissed later, on good terms, with Warren having to challenge her.

New York Times: When Ms. Yellen avoided the question, Ms. Warren persisted, “Have they ever gotten to a plan that you can say with a straight face is credible?”

Ms. Yellen demurred again and the hearing ended.

Ms. Warren walked over to Ms. Yellen and kissed her cheek. The two women laughed, and chatted, and left.

Yellen's choice of outfit for televised panel not so good.

Avoid Small Patterns - Checks, stripes, plaids. What happens, even in HD, is that the camera cannot pick up the focus on these and they almost start to "dance" on screen as you begin to talk or breathe!

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