Janet Yellen

"The system we have now is one in which the Fed decides, through a Politburo of planners sitting in Washington, how much liquidity is necessary, what the interest rate should be, what the unemployment rate should be, and what economic growth should be. There is no honest pricing left at all anywhere in the world because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore because so much of it depends not on market forces, but on the whims of people at the Fed."

The selloff last year was a desperate warning about the lack of resilience in credit and funding. That repo markets persist in that is, again, the opposite of the picture Janet Yellen is trying to clumsily fashion. Central banks cannot create that because their intrusion axiomatically alters the state of financial affairs, and they know this. It has always been the idea (“extend and pretend” among others) to do so with the expectation that economic growth would allow enough margin for error to go back and clean up these central bank alterations. That has never happened, and the modifications persist. Resilience is the last word we would use to describe markets right now, with very recent history declaring as much.

This week was very busy with economic data. For the most part, the majority of the data came basically inline with expectations. However, the internals of the various reports were much less encouraging. The most noteworthy report, and the least important from an investment standpoint, was the monthly employment report which came in at 288,000 jobs for the month. As with the bulk of other reports, the more important details were lost to the headlines... full-time employment relative to the working age population has remained primarily stagnant since the financial crisis and actually fell in the latest month. This is a key reason why economic growth continues to struggle.

Opinions about the U.S. economy boil down to two views: 1) the recovery is now self-sustaining, meaning that the Federal Reserve can taper and end its unprecedented interventions without hurting growth, or 2) the current uptick in auto sales, new jobs, housing sales, etc. is as good as it gets, and the weak recovery unravels from here. The reality is that nothing has been done to address the structural rot at the heart of the U.S. economy. You keep shoving in the same inputs, and you guarantee the same output: another crash of credit bubbles and all the malinvestments enabled by monetary heroin.

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• Goldman says client data leaked, wants Google to delete email (Reuters)
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Janet Yellen is a chatterbox of numbers, but most of them are “noise”. And that’s her term. Yet here is a profoundly important set of numbers that you haven’t heard boo about from Yellen and her mad money printers. To wit, during the “difficult” economic times since the financial crisis began gathering force in Q1 2008, the S&P 500 companies have distributed $3.8 trillion in stock buybacks and dividends out of just $4 trillion in cumulative net income. That’s right, 95 cents of every dollar they earned - including the huge gains from restructurings, downsizings and job terminations - was flushed right back into the Wall Street casino.

Current forward S&P 500 P/E: 15.6x
Forward S&P 500 P/E on October 9, 2007: 15.2x

Goldman Sachs listened (and read) Janet Yellen's remarks at The IMF and see them "generally in line." Despite waffling on for minutes about risk management and monitoring, no one at The Fed has mentioned the total carnage in the repo market, spike in fails-to-deliver, and record reverse repo window-dressing that just occurred. The use of the term "reach for yield" twice and "bubble" 5 times, and admission that the Fed should never have popped the housing bubble, leaves us less sanguine than Goldman and wondering if this was Janet's subtle and nervous 'irrational exuberance" moment.

Alongside that other canard of global monetary machinations, Christine Lagarde (who oddly declared earlier that "the global economy will not return to 'pre-crisis' world" and asked if central banks need a 'financial stability goal' -mandating a market "put" of sorts); Fed head Janet Yellen will be addressing her peers at The IMF this morning. We expect a lot of "noise" comments, "lower for longer", "weather" excuses, and escape velocity is coming any minute as she desperately tries to keep the "don't worry, you will be ok without all our money printing" meme alive.

To the Fed's Janet Yellen, runaway inflation - at least that which can not be "hedonised" away by the BLS like iPad and LCD TV prices - may be simply "noise", which probably explains why she doesn't rent. But for the record number of Americans who are forced to rent as house prices are too high for the vast majority of the population while mortgage origination has tumbled to record lows (as banks can generate far higher returns on reserve by buying stocks than lending out said money), inflation is going from bad to worse. Case in point: as the WSJ shows, since 1990 asking rents - in real terms i.e., adjusted for inflation - have increased a whopping 15%. The change in median income over the same period? 0%.

Janet Yellen is an officious school marm. She constantly lectures us on Keynesian verities as if they were the equivalent of Newton’s Law or the Pythagorean Theorem. In fact, they constitute self-serving dogma of modern vintage that is marshaled to justify what is at bottom an economic absurdity. Namely, that through the primitive act of banging the securities “buy” key over and over and thereby massively expanding its balance sheet, the Fed can cause real wealth - embodying the sweat of labor, the consumption of capital and the fruits of enterprise - to magically expand beyond what the free market would generate on its own steam. Dr. Yellen, of course, claims there are no financial bubbles to worry about because the Keynesian bathtub of potential GDP has not yet been filled to the brim. Perhaps she would like to put in a bid for one of these homes...

Anyone curious how real, GAAP EPS performed in the just completed quarter, should look at the chart below. It shows that GAAP EPS (helped by a record amount of corporate buybacks) in the first quarter of 2014 actually dropped 2.2% from Q1 2013 even as Non-GAAP suggested a nearly 5% increase!

"... it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally....  Never before have central banks tried to push so hard... Few are ready to curb financial booms that make everyone feel illusively richer.  Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms.... The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end."

"If you're not concerned, you're not paying attention" say Axel Merk, founder and Chief Investment Officer of Merk Funds (and former President of the Federal Reserve Bank of St Louis and a former FOMC member). Like many, he sees today's excessive high-price, low-volume, zero-volatility markets as an unnatural and dangerous result of misguided intervention by the Federal Reserve... "Now, the capital base and the equity of the Fed is very small. Odds are that the losses would wipe out the equity at the Fed."