Janet Yellen

While Janet Yellen is bust ignoring "noisy" inflation and dismissing low volatility as indicative of any complacency, Goldman is a little more concerned. The decline in economic and asset market volatility this year from already low levels in 2013 has been striking, which as Markus Brunnermeier states, means "the whole system is more prone to a financial crisis when measured volatility is low, which tends to lead to a build-up of risk in the background – the so-called 'volatility paradox'."

The government now has another measure which under-reports inflation by accounting chicanery...

It wasn’t an edgy blogger but the Office of the Comptroller of the Currency that issued the warning.

Janet Yellen has dismissed rising inflation figures. They were “noisy,” she said. She didn’t like the sound of them. Valid numbers are harmonious. Invalid ones are cacophonous. But after so many years of listening to such loud noise coming from her own colleagues, poor Ms. Yellen may be tone deaf. At least, that is one explanation for her nonchalance toward the threat of inflation.

With the market firmly under the control of the Fed, VIX plunging and the S&P at all time highs is the a different indicator to look at for "fear"? For one possible answer we refer to the latest note by FBN's JC O'Hara who looks at a different "fear" index, namely the Credit Suisse Fear Barometer. He finds that, at 37%, it has never been higher.

The American financial establishment has an incredible ability to celebrate the inconsequential while ignoring the vital. Last week, while the Wall Street Journal pondered how the Fed may set interest rates three to four years in the future (an exercise that David Stockman rightly compared to debating how many angels could dance on the head of a pin), the media almost completely ignored one of the most chilling pieces of financial news that I have ever seen. According to a small story in the Financial Times, some Fed officials would like to require retail owners of bond mutual funds to pay an "exit fee" to liquidate their positions. Come again? That such a policy would even be considered tells us much about the current fragility of our bond market and the collective insanity of layers of unnecessary regulation.

The May surge in airfare prices was so dramatic and unexpected, that on a compounded annualized basis (CAGR), the May surge in airline fares was a whopping 97%: the highest since 1999, and the third highest ever.
So, sorry America: you are stuck where you are, eating food that has rarely if ever cost more, fueling up with gas that is approaching it all time high summery prices. Enjoy Yellen's "noise."

The Federal Reserve’s policy of quantitative easing has produced a historically prolonged period of speculative yield-seeking by investors starved for safe return. The problem with simply concluding that quantitative easing can do this forever is that even speculative assets have to compete with zero. When a safe zero return is above the medium or long-term return that one can estimate for a very risky asset, the rationale for continuing to hold the risky asset becomes purely dependent on expectations of immediate short-term price gains. If speculative momentum starts to break, participants often try to get out the door simultaneously – especially if there is some material event that increases general aversion to risk. That’s the dynamic that produces market crashes.

As Komal Sri-Kumar points out in this harsh (but fair) discussion of the Fed, (as Tim Iacono notes) the central bank’s abysmal track record on forecasting economic growth and how they have a fantastic track record for “taking the punch bowl away” far too slowly should worry all. "The Fed has been wrong every time on its growth forecast and overly optimistic," Sri-Kumar rants, adding that "the Fed is wrong in terms of its  benevolence to the markets." The current environment reminds him of early 2008 noting there are "lots of characteristics which are similar and it worries me a lot." Simply out, "they’ve had five years of quantitative easing, big bond purchases, quintupling of the Fed balance sheet. And we don’t have sustainable economic growth," but the great medication is not working, and "the remedy is that you have to take the shock."

Have you noticed that prices are going up rapidly?  If so, you are certainly not alone.  But Federal Reserve chair Janet Yellen, the Obama administration and the mainstream media would have us believe that inflation is completely under control and exactly where it should be.  Perhaps if the highly manipulated numbers that they quote us were real, everything would be fine.  But of course the way that the inflation rate is calculated has been changed more than 20 times since the 1970s, and at this point it bears so little relation to reality that it is essentially meaningless.  Anyone that has to regularly pay for food, water, gas, electricity or anything else knows that inflation is too high.  In fact, if inflation was calculated the same way that it was back in 1980, the inflation rate would be close to 10 percent right now.

For the last two decades Coach (COH) could do no wrong. Its aspirational handbags flew off the shelves at hefty prices, causing its sales to soar from $1.3 billion to $5.1 billion during the 10-years ending in fiscal 2013. Better still, its EPS soared by 6X, representing a 20% earnings growth rate over the same period. Greatest of all, its share price peaked at nearly $80 in 2012 after having opened the 21st century at $3 per share. Needless to say, the believers and speculators who got on board for the 27X gain in twelve years were fabulously rewarded, as was its founder and largest stockholder, Lew Frankfort, who became a billionaire along the way. So the capitalist dream is still working in America, right? Not exactly.

Janet Yellen just cemented her status as the third member of the unholy triumvirate of Fed Presidents: Greenspan, Bernanke, and now Yellen.

On the day after Chairman Yellen’s press conference, investors aggressively bid up inflation trades across numerous asset classes. Gold and silver rallied sharply, TIPS implied inflation breakevens widened (despite a new slug of 30-year supply), Treasury yields rose, and the yield curve steepened. Based on investor positioning and market sentiment (CFTC’s Commitment of Traders data show record net short positions exceeding $1.5 trillion in notional rates exposure among speculators in the eurodollar futures markets), there’s decent potential for additional gains in these inflation expressions in the days and weeks ahead.