Comstock Partners, Inc.March 25, 2015
Chairwoman Yellen has Investors in the Palm of Her Hand
The entire investment community was waiting on the edge of their seats for Chairwoman
Janet Yellen to make an announcement on March 18th at 2:00 PM in a news conference. They were all waiting to see if the word “patience” was removed from the Federal Reserve’s statement. And not to disappoint the investors Yellen did announce that the word “patience” was removed from the statement (meaning that the Fed would not be eager to raise rates, but would be patient). However, that announcement was followed by long explanations about the fact that if the Fed did move to raise rates the rate increases would be very slow.
Since the worldwide investment community was anticipating the removal of the word, the stock market was down over 100 points on the DJIA at 2 PM as the announcement was made. Virtually every investor (large and small) were “chomping at the bit” to sell equities if they detected the removal of “patience”, since that meant to them the “removal of the punchbowl” the Fed was supplying to the investment community over the past 6 years. Those were the years the Fed pumped trillions of dollars into the U.S. economy driving up stocks, bonds, and real estate as well as supporting the economy.
The investors were satisfied that the stock market would continue declining as the word “patience” indicated that the Fed’s use of the word meant that the Fed would wait patiently no matter how fast the economy grew before they raised interest rates. Also, each time they removed their Quantitative Easing during the past few years, the stock market fell as a consequence of the tightening, only to rise again as another QE replaced the one that was stopped.
However, as soon as Janet Yellen started her speech, she made it as clear as possible that even though “patience” was removed from the statement, she went to extreme measures to show investors that the Fed would not be raising rates anytime soon. She started by explaining that the dollar rose 20% over the past year and the Fed was watching the dollar very closely. The path of least resistance would be higher for the dollar and that would hinder inflation moving up to the Fed’s mandate of 2% and could help to generate deflation. The dollars’ rise could also hurt the earnings of multinational U.S. companies that export goods abroad. She also stated that the Fed lowered its projections of future GDP and other economic data to make it abundantly clear that the Fed would not raise rates anytime soon.
This was all to allow these same investors who were still on the “edge of their seats” to relax after giving them a clear signal that when it comes to raising rates, they would be even more “patient” than when the word “patient” was included in the Fed’s prior statements. This started a reversal of the stock markets all over the globe. We went from down about 150 points on the DJIA to plus 227 points. It was incredible to watch Yellen manipulate the greatest investors in the world to do exactly what she planned.
The most amazing thing, as far as Comstock is concerned, is the fact that almost all investors are ready to move with whatever Ms. Yellen says and follow her as if she were omnipotent. In the past 20 years the Fed has been one of the worst prognosticators of the economy in the world. And much more important than just predicting poorly is the fact that they acted on the predictions. For example, Greenspan was 4 years early with his “irrational exuberance” warning in 1996 (just before the market tripled), and reversed that position just in time before the 2000 stock market crash led by the dot coms that were the most over- valued sector in history .
Even worse than the calls in 1996 and 2000 was the fact that Greenspan lowered rates to 1% in mid-2003, and kept them there for a year. This caused the start of a housing bubble and debt accumulation that was unprecedented. That was when Comstock was warning our viewers about a housing bubble in every single comment we wrote. Greenspan again stated during the period of 2005 to 2008 that you cannot predict a bubble until the bubble bursts. That was just before the sub-prime mortgages and debt collapsed on the U.S. economy and all developed countries in the world causing the “great recession”.
Even more amazing is the fact that the Fed has not been correct in virtually all its major calls from Greenspan, Bernanke, and now Ms. Yellen. (The last time the Fed was correct in its prognostications was when Volcker raised rates to control inflation in the 1970s and early 1980s.) To top off the last 3 of the Fed’s poor predictions was team Bernanke’s tightening in 2008. They followed that up by leaving short rates unchanged between April and October as the economy was crashing. He and his team also made hawkish statements that restricted demand and worsened the decline in the economy.
Janet Yellen hasn’t been around long enough to be able to look back at her positions and actions, but it is clear that her predictions of “an overvaluation of the biotech industry in July of 2014 has been clearly wrong since that industry rose about 50% over the past year. We, at Comstock, believe that the latest moves by Yellen and her team will prove to be just as bad as Greenspan and Bernanke. And if she winds up starting another QE, it will produce the same result as the prior two chairmen. Of course there is one person on her team, James Bullard (President of the St. Louis Fed), stated just this week, "When asset bubbles start, they keep going until they blow up out of control with devastating consequences". This statement could change the history of poor calls by Fed members.
Our strong belief at Comstock is that the Fed will not raise rates during the current year and following year because of a weak deflationary economy. In fact, we believe that the Fed (under Yellen) will start QE-4 this year, but this time, instead of a stock market rise, we believe that the investment community will recognize the trouble the Fed will continue to have in “normalizing” rates. This time, in our opinion, there will be an exit from stocks and commodities and result in a severe bear market. So once again, we at Comstock remain skeptical of the Fed Reserve leadership and its ability to steer the U.S. economy away from the disaster regardless of their clever wording.