Two days of testimony separated by two weeks of time due to Polar Vortexes, snow storms in winter (how odd) and egg on the face of Al Gore (how appropriate). But still Ms. Yellen didn’t bring anything to the table but her bibliography of papers she had previously memorized. Two weeks more to rehearse the playbook and she still got flustered with basically “hello” type questions. For instance, one senator simply asked her what the size of the Fed’s balance sheet was; she hesitated and wasn’t sure. The follow up question inquired about the amount of MBS securities the Fed held; she flat didn’t have any idea. Later another senator asked her about why the Federal Reserve doesn’t conform to the Basel III capital reserve requirements; Ms. Yellen mumbled unintelligible gibberish until she finally moved her lips but no words came out whilst moving her arms seemingly without control while she inwardly begged to be given a pass … a charity that the senator, after watching five seconds to eternity, kindly extinguished by changing the subject!
We are beginning to think that this woman, although qualified academically, has only memorized the flight plan without ever having experience flying the plane. A dramatic accident waiting to happen as theory bumps its warm primrose head into the cold hell called reality. Ms. Yellen has no chops, and worse, gets flustered quickly losing her sense of equilibrium. Imagine this Chairwoman of the world’s preeminent central bank staring into the eyes of a market meltdown being called to testify to the American people and Congress what tricks her trusted Federal Reserve has hidden in her text books to quickly resolve the crisis? We don’t think a bibliography will work and we don’t think the Chinese, Japanese and other faithful international holders of US Treasuries will be subscribing either. A big problem is Ms. Yellen has no Henry Paulsen to go crying to as her predecessor Ben Bernanke had. As we alluded to in previous letters, this is the first Fed, Treasury and Economic Advisory staff absent of any individuals with market experience. Although we are uncertain as to when, we firmly believe that this Fed will be tested and maybe sooner than later.
Time and time again, we hear the bullish camp clinging to the axiom of “there’s no other place to go” or “buy the dips until they don’t work”. The latter principle being metaphoric to give the ball to Larry Csonka (Miami Dolphins circa 1974; undefeated NFL champions) up the middle for five yards. The former self-evident truth is harmonious to a heroin addict’s explanation to the cops as to why he busted into the local pharmacy. Yes, the market is at new highs. Yes, buying dips has obviously worked well given we are at new all-time highs in most indices. But it’s feeling lethargic; like it needs more stimuli (drugs) stay afloat. Maybe the market is set to explode higher and maybe it’s at the point of diminishing returns; and oh, maybe the stimuli may too be diminished. Perhaps not if Janet Yellen has her way promoting the General Theory of Employment, Interest and Money by her omnipotent John Maynard Keynes.
Ronald M. George
William J. Taylor
February 27, 2014