Janet Yellen’s Motivations


“It’s too late to fight
It’s too late to change me
You may be wrong for all I know
But you may be right
You may be right
I may be crazy
But it just may be a lunatic you’re looking for
Turn out the light
Don’t try to save me
You may be wrong for all I know
But you may be right
You may be wrong but you may be right
You may be wrong but you may be right”

Billy Joel – You May Be Right Lyrics

My World View in Very Brief 

I have a view of the world that has evolved from suspicion that it might be true to being completely convinced that it is true. I believe that the rich and powerful have a lot more influence on events than even our most assertive novelists, journalists and movie producers suggest.

I am not talking about conspiracy though. I think that that most conspiracies are just too difficult to keep secret. 

What I am suggesting is that there are converging interests among small groups of wealthy and powerful people in America that drive domestic, and many global, events and outcomes in a particular direction. That is not conspiracy. That is confluence. The meeting of separate interests into a resulting outcome or outcomes at some point or points in time. 

Sometimes the confluence of interests into outcomes is happy. Other times, not so much. 

In 2008, we saw various interests combine into a perfect storm with the outcome being the financial crisis. The interests that were involved included greed from bankers, brokers, mortgage lenders (and some borrowers, although their impact would have been very minimal if not for the products and leverage created by the bankers, brokers and lenders), as well as, the breaking down of regulation of that greed using ideological justifications.

Despite so many losing as a result of the financial crisis, there were winners. Some big, some very big, some massive.

Of those who benefitted – bankers, sales people, mortgage brokers, etc… – in the lead up to the crisis, how many of them thought about what would come next? It seems very few. However, their combined actions certainly led to the outcome that most people agree was bad.

But what about those who won from the actual outcome of a financial crisis? There were a handful of people who publicly proclaimed that the crisis was coming and made bets large enough to become billionaires on it. David Einhorn is one of those people. He took an accurate view of the world and turned it into a precise trade. I talked about that sort of thing in a Lessons in Investing entry. 

There is another set of winners from the financial crisis as well. Those who were holding a lot of cash at the time of the crisis were able to go out afterward and buy a lot of distressed assets, particularly real estate. Private equity firms and some very wealthy people have made a lot of money the past five years. They have made so much money in fact that the difference between the wealthy and not wealthy has become much more pronounced. Despite the aggregate amount of new wealth, the middle class has drifted lower, not higher, in standard of living despite there being a Democratic President which many thought would reverse that trend.

One of the key facilitators to the success of the very few after the crisis has been the Federal Reserve’s easy money policies that most “regular” people do not really benefit from. Without the easy money, the markets, all of them, stocks, bonds and real estate, probably couldn’t have made half of the gains we’ve seen based on organic economic factors. It took easy money to drive, in my opinion, about the second half of the rebound in all of those asset class markets from the respective bottoms.

Here’s an important question. Did the interests of those who have benefitted from the easy money play into the decision by the Fed to institute the extraordinarily easy money policies? It’s a deep dive question. 

Many might immediately jump to the conclusion that some of the rich and powerful directly influence the Fed. I’m not so sure the influence, if there is any, is that direct. I do in fact believe that there is influence, though like much of science, it can not be proven, it can only be observed and analyzed from outcomes.

I think the influence on the Fed stems from the multitude of ideas about economics, none of which is pure or perfect by any stretch of the imagination. If those ideas can be manipulated, or simply become popular as a reaction to prior events, the manipulation of education over time or even propaganda, then those ideas can be used to create a likelihood of certain events and outcomes happening, which in turn, can influence other events and outcomes. Alice would have a hard time this deep in the rabbit hole too I suspect.

Why Was Ben Bernanke Hired?

Consider Ben Bernanke’s ideas about “inflation targeting.” I urge you to read his book and think about it as if you were the people in charge of finding a new Fed Chairman after Alan Greenspan. Take a good long time to think about inflation targeting and why Ben Bernanke was even hired. What I am going to imply requires that you not be a checkers player. You need to be a chess player using a 3D, multi-level, animated board and have a magic incantation book at your disposal.

[If you have ever read anything about George Soros’ Theory of Reflexivity I think it will help, but it is not necessary, to understand the twisting turning nature of direction that I envision.] 

Let’s continue on our journey by considering the hiring of Ben Bernanke as Federal Reserve Chairman in late 2005. He is a Great Depression expert. Does it strike anybody as curious why he was hired when the economy and markets were supposedly booming. Many folks (not me) thought we would need somebody to cool things off, not rescue us from a depression. Why then did President Bush appoint a Fed Chairman who said he would drop money from helicopters in the event of a crisis? Did the administration know to prepare for a crisis of deflation rather than the crisis of inflation that many (most) others feared? 

I don’t know the answer to that, but I have a suspicion. 

This isn’t meant to be a history lesson or an invective. I am simply trying to find primary actors and reasons for the direction of things. I think if I can get closer to the place where money ends up when I try to “follow the money” – as I have heard to do if I really want to understand why things happen and how things work – then I have a better chance at understanding what likely future outcomes might be. 

What is Janet Yellen’s Motivation?

Much has been made recently of a future Fed rate hike. There are opinions all over the map about what Janet Yellen will do and when she will do it. Quite a few are afraid that if the Fed raises rates that will stall the economy and hurt markets. I think there is some truth to that, however, as I wrote about on MarketWatch, it is not the main factor as to why the economy might stall soon. 

This past week Christine LaGarde of the International Monetary Fund warned that the Fed should not raise rates soon. A few Fed Governors agree with her – mainly those who wrongly consider themselves to be Keynesian (I am Keynesian regarding the nation, currently America, that has the reserve currency for cyclical events, but as I discuss elsewhere, we are not dealing with cyclical economic problems, the global economy is different structurally than it was from the Post WWII era to 2008).  

Let’s think about what influences Janet Yellen. Most would say it is inflation and full employment, or the general economy. I think that is part of it, but I think that is the checkers player analysis. 

What if the forces that influence Yellen, from her own psyche, ethics, theoretical economic understanding, sense of duty or patriotism, and people around her lead her to think about things beyond inflation or full employment in what she says is a data driven decision process? What if she believes that long-term aggregate wealth accumulation of Americans is her real job and that it is up to the politicians to make sure standard of living is appropriately overseen. What if she is a shill of somebody or some group (I don’t think this is likely). 

If Yellen is a shill, say to the Democrats or Wall Street, then she will keep rates lower longer and maybe put off a rate increase, possibly until spring of 2016.

What if she’s not a shill, which is likely in my opinion, or a shill to people we don’t generally consider? What if she cares about the standard of living of Americans, which I think she does. We know that it is very hard, if not impossible, for the Fed to create a better standard of living for Americans. What the Fed can influence is the aggregate accumulation of wealth to Americans, even if it is very top heavy, however. If the aggregate accumulation of American wealth is a consideration, then it stands to reason that Yellen’s next actions will be to maximize total return to America and that distribution is up to markets and the politicians. 

So, if Yellen wants to maximize American wealth, then what will she do next? In my opinion, she raises rates in a slightly unexpected way. Why? Because there is literally more trillions of U.S. dollars sitting in cash and short-term U.S. Treasuries than at any other point in history. If Yellen raises rates, especially in a slightly unanticipated manner, then the dollar will at least continue gliding higher, as I said it would way back in 2012 when most others said it was going to crash in my viral article Dollar Strength Beyond the Balance Sheet, and it could spike. If the dollar spikes, then we will get a strong dollar sell-off in the markets and those with the trillions of liquidity will be able to go on a massive international buying spree for tomorrow’s growth assets, most of which are in international markets. That would certainly increase the aggregate wealth of Americans.

In my opinion, the LeGarde concerns are a tip off. If she is against a rate hike, then I think it is more likely that Yellen does in fact raise rates. There is nothing more that many Americans like than not doing what the international community wants. That’s quite some cover for Yellen, along with the recent employment number, for Yellen to raise rates.

There is so much cover for Yellen to raise rates right now, that I think she might raise rates 10 basis points this month, or next, just to show the direction that she is definitely going to go, get off of the zero bound and create volatility. Yes, I think the Fed wants volatility. The EIOPA, which regulates insurers and pension funds in Europe, has already warned to expect volatility. Maybe they see what I see coming.

Here’s another tidbit to ponder. The U.S. needs to refinance about $3 trillion of debt very soon. To do so will require either a new round of quantitative easing (QE) in my opinion, or a flight to safety by international investors. 

Expect the unexpected. Expect volatility. Expect markets to correct more soon.

If you are really looking at markets from the bottom up as I do, you can see that markets are already over-valued and strained, and in fact, have begun a sort of rolling correction already. Technicians who measure liquidity can also see a correction beginning. 

When thinking about money, remember the old wisdom: “If you want to know how things really work and why they really happen, follow the money.” I would suggest following the big money.

Kirk