Janet Yellen's Flight Path

June 29, 2016

 

 

At the Congressional Testimony of the US Federal Reserve, Janet Yellen indicated that the economic growth of the country has been uneven in terms of certain demographic groups. However, she failed to expound the reasons nor give any clear answers as to why these demographic groups are being penalized in the American economy.

Sure, by lowering reserve requirements banks are given the capability to loan more money and increase the supply of money in the economy. So why have the banks failed to expand lending to these demographic groups? Perhaps it has to do with the American stock market and its quest for yield.

 

The financial institutions are more willing for Corporate America to continue their party and buy back shares to sustain not only the yield, but their share prices. This is no different than what the Chinese Central Command is doing: printing money to boost up their stock market. Even though the financial institutions control the markets at this point, we can not affirmatively guess how many Americans have leveraged their homes to play the markets.

The Dow Theory may be experiencing a certain crack exposing the stock market and the American economy as a whole to a larger decline than predicted. The question is when will animal instincts kick in? As long as there’s liquidity, markets will continue to rise. What is uncertain is the confidence of the American individual investor that has materialized no different than the survival of the fittest of the financial institutions that also hold shares.

Once demand weans for American corporate shares, we must question who will purchase these shares. Are the market makers and financial institutions willing to hold the bag? Wall Street has their own consolidated beliefs of where the trend will go. However, it may not coincide with the doves and hawks interacting with each other to move the market up or down as they see fit.

 

The Dow Theory suggests everything is known and exists in the market no matter what. But any great theorist understands how the theory transforms itself on its own accord and takes into account the built in mechanism which is unknown; that is the achilles heel. 

 

If the markets are imperfect, then what makes the Fed more perfect than the markets themselves? On November 8, 2002, Bernanke gave a speech to honor noble prize winner Milton Friedman on his 90th birthday. Bernanke admitted that it was the Fed who caused the Great Depression. Bernanke concluded his honor to Friedman by stating, "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." This statement alone will play an ominous role in the future of economic thinkers. In 1929, the Feds wanted to "pop" the bubble because the stock market was too high. At that time, the bankers realized that nothing is real or tangible until you cash in. However, in 1929, the Fed and bankers were unfamiliar with the herd mentality. The rationale of the privileged class in 1929 was no different than a bored kid blowing a balloon and popping it, waiting in anticipation to hear the pop by jumping up and down. In 1929, the classical economist believed in the real business cycle theory. People don't work less because they are fired or laid off, they work less because wages are too low and leisure is the better option.

 

The bulls and the bears play the same symphony as the Fed's doves and their so called hawks. When risk investment gets high they both become nervous. Not only do the hawks convey the message, but the doves stay away. The bankers know that the Fed is in control. Richard Fisher, CEO of the Federal Reserve Bank of Dallas, stated, "The FOMC has made money the cheapest and most widely available of any time in American history. Interest rates dipped to their lowest level in 237 years; bond and stock markets rallied to historic highs in both nominal and real terms; bankers and investors are flush with liquidity; for anybody who is creditworthy, money is uber-abundant. This will not last forever. One would be foolish not to exploit it now."

 

Richard Fisher knows that this market can’t sustain itself forever. The bankers know that even if the market corrects itself 10% they may risk the move that there will be no more buyers of shares that they hold in inventory. The bankers must provide liquidity to buy shares that no one wants. If it keeps on dropping it will take even the market-makers by surprise and their Fibonacci rules with it.

 

There seems to be a great deal of anxiety over Brexit and we are all aware that Janet Yellen has this under control, why shouldn’t she? She stated that it may lead to volatility, negatively impacting the American financial markets. With the Fed intervention in the markets, you can be sure that the doves will be ready to lift up the corporate world that seems to deny certain demographic groups of the American dream.

 

The degree of anxiety started with a rumor. Two weeks ago, the flight started in Vancouver and landed in Montreal. It was a 200-seater Air Canada jet that only occupied two British executives. Inside the cargo was a multitude of computers and hard drives, their destination was Panama. They made sure to circumvent American airspace for the simple reason that they had to show the manifest. They arrived in Panama; talk about opulence and anxiety.

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