Summers Gone and the Markets are Yellen!

Summers

Who knew that Larry Summers was so powerful?

Just the mere mention that he doesn’t want to be the Fed Head caused major moves in every key market. Turns out that markets felt that he would be a curmudgeon with Fed policy, as least compared with leading candidate, Janet Yellen.

The market views Summers as far more hawkish when it comes to monetary policy. They believe that he would taper quicker and bigger than Yellen.

They are probably right.

After all, Summers has actually had real jobs in his life so has at least a brushing acquaintance with reality. Yellen has been an academic or government worker for her whole life.

So it should be no surprise that she is supportive of a very easy monetary policy.

Some say she should be the next Fed Chairman.

Mark Gongloff, of the deep analytical publication, the Huffington Post, points out that she said, “Policy makers should be compelled to take action given the serious costs of long-term unemployment when overall unemployment is already high. A week of unemployment is worse when it is experienced as part of a longer spell.”

Certainly, unemployment is one of the twin but often contradictory goals of the Fed. The other being a stable currency. And, certainly, I support lower unemployment!

But current Fed policy, which presumably Yellen supports as the vice-chair, is anti-unemployment. The Fed is buying virtually of the Federal Government debt under the idea that low interest rates will stimulate the investment and housing arenas.

However, this has not and will not happen due to a flawed understanding of how economies work.

 

1. Buying all Treasury debt keeps interest rates low. This helps our deficit now but masks the true cost to the economy. The Federal government is encouraged to borrow more because rates are low but is now building up unsustainable levels of debt that is creating an unsustainable level of interest costs. The Treasury NEEDS to have zero interest rates or Federal interest payments will become the second largest expense of the Federal government in just a couple of years. Compounding can be a heavy burden when it is working against you!

2. Low interest rates are killing employment! You see, every business makes the decision when they are growing to either hire more people or buy a machine to increase productivity of the existing employees. Low interest rates have caused a huge shift to machines and away from hiring people. Low interest rates make it more attractive to boost productivity of the existing employees rather than hire people. So Yellen’s idea is totally idiotic if she really cares about unemployment.

3. Low interest rates have helped the housing market but it took years to see that help. Low interest rates cause the real cost of owning a house decline, thus boosting housing demand. So let’s count this as a check in Yellen’s favor. But the cost is so high that I am not pleased by this false boosting of demand. The problem is that every element that caused the housing crisis IS STILL IN PLACE! So Yellen’s policies will eventual lead to another housing crisis within the next ten years!

The bottom line is that the Fed is trying to play God with our money. The twelve academics on the Board of Governors of the Fed have proven themselves to be incompetent. Yellen will just be the latest.

In the meantime, we can clearly see that the market is simply being supported by the Fed, not economic fundaments. Fed tightening will lead to at least a 10% correction in the market and more likely a 20-30% correction.

I’m not Yellen.

_______________________________________________________________
Advertisement

Can YOU Make Healthy Profits Using Biotech Options?
Biotech stocks are often boom or bust. They pass their FDA tests and the stock skyrockets. Fail the test and stock plummets. They are hard to trade. Unless you use options! Now you can take a much calmer approach to biotech profits. To make money in biotech, you need to know about biotech and options. Click here to find out more on this potentially profit making combination!
_______________________________________________________________

This entry was posted in Investing General. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *