Janet Yellen

The Senate Banking Committee’s confirmation hearing for current Vice-Chair of the Federal Reserve began with Janet Yellen delivering prepared remarks.  Most observers likely tuned out well before the completion of the 2 ½ hours meeting to decide whether Yellen was worthy to succeed outgoing Chair Ben Bernanke and ascend to the top spot at the Fed. With the ongoing debacle of the Affordable Health Care website handcuffing Democrats, tough questions about QE, ZIRP, the oft talked about Taper and the possibility of reducing the Fed’s gargantuan $4 trillion balance sheet were verboten.  That left Republicans to address the elephant(s) in the room.  Predictably, it took nearly the entire hearing until a Senator from Nebraska offered his views about the damage being done by the various fiscal and monetary machinations undertaken to combat the Great Recession.  What happened, beginning just after the 2 hour point of the meeting, was both remarkable and revealing...

Gold prices pulled back this morning as traders booked gains and stagnant physical demand had the yellow metal out of favour. Recent confirmation by Janet Yellen that she will continue Bernanke's loose monetary policy lifted gold, but tapering appears priced into the metal already.

The only numbers that matter today are 16000, 4000 and 1800: those are the Fed's closing targets for the Dow Jones, the Nasdaq and the S&P. Following last night's Chinese euphoria which saw the Shanghai Composite surge by 2.87%, or up 61.4 to just under 2,200 on renewed hopes for Chinese reform by 2020, the Fed's price targets should all be quite easily achievable. And not even the rising home prices in 69 out of 70 cities year over year, and 65 over month - the same as last month, with new nome price inflation at 0.6% overall and 0.8% for the first tier cities, was able to put a dent in the reflationary spirits in the Mainland. Additionally, news that China would join the US and Europe in "adjusting" its GDP calculation method, which would add R&D expensing into the bottom line, and as a result boost the overall number, is, well, helping things. Finally, with today's POMO a rather whopping $3-$4 billion, it is only a matter of time before all three of the previously noted psychological resistances are promptly taken out by the Fed's open markets desk.

The only way to keep the status quo from imploding is to banish common-sense.

The third stage of bull markets, the mania phase, can last longer and go farther that logic would dictate.  However, the data suggests that the risk of a more meaningful reversion is rising.  It is unknown, unexpected and unanticipated events that strike the crucial blow that begins the market rout.  Unfortunately, due to the increased impact of high frequency and program trading, reversions are likely to occur faster than most can adequately respond to.  This is the danger that exists today. Are we in the third phase of a bull market?  Most who read this article will say "no."  However, those were the utterances made at the peak of every previous bull market cycle.

Despite Janet Yellen's commitment to continue supporting the economic recovery the transmission system of government interventions is clearly broken. As STA Wealth Management's Lance Roberts shows in the simple chart below, it has taken $35.17 of government intervention to generate $1 of economic growth over the past 5 years. More importantly, the rate of diminishing returns is increasing. In other words, it is taking consistently more dollars of intervention to create an incremental increase in economic growth.

• China to Ease One-Child Policy (WSJ), China announces major economic and social reforms (Reuters)
• Consumers line up for launch of PlayStation 4 (USAToday)
• Trust frays between Obama, Democrats (Politico)
• Yellen Stands by Fed Strategy  (Hilsenrath)
• Hero to zero? Philippine president feels typhoon backlash (Reuters)
• Brussels warns Spain and Italy on budgets (FT)
• Moody’s Downgrades Four U.S. Banks on Federal Support Review  (BBG)
• CIA's Financial Spying Bags Data on Americans (WSJ)
• Germany Digs In Against Risk Sharing in EU Bank-Failure Plan (BBG)
• Bill Gates wants Norway's $800 billion fund to spend more in Africa, Asia (RTRS)

How is inflation of 2% acceptable? Why is this base assumption never challenged? At this rate, in 10 years you’ve lost roughly 20% of your purchasing power. And during the average worker’s lifetime, they will see a 40-60% decrease in purchasing power.

The woman who is set to become one of the most powerful people in the world begins her confirmation hearing today. And few people have ever even heard of her. A tiny elite orchestrates the whole system. And one of the most influential conductors is the Chairman of the Federal Reserve, a post about to be taken over by Janet Yellen. Since most people have no idea how central banking really works, her confirmation hearing today is just a footnote. Even people who are otherwise financially sophisticated simply trust that the men behind the curtain know what they’re doing. This is quite strange when you consider that central bankers have nearly total control over the economy. Kyle Reese from the first Terminator movie sums this up rather succinctly...

Today the treasury auctioned off 16bln 30yr bonds at 1pm (ET).  This occurred during a fairly volatile backdrop.

There was a lot of competition for Quote of the Day today. Between President Obama's double-speak, a rationally exuberant Janet Yellen, and overnight idiocy from Suga and Abe, choices were numerous. But the following from Gary Gensler - still chair of the CFTC - took the provberial biscuit:

*GENSLER: 'I THINK MARKETS WORK BEST WHEN THEY'RE TRANSPARENT' (but)
*GENSLER SAYS HE 'BENFITED FROM DARKNESS' IN WALL STREET CAREER

Well that sums it all up.. The question is - will Massad have a CFTC-shaped floodlight fixed to the roof of the agencies' building?

In response to questions from members of the Senate Banking Committee at her confirmation hearing, Janet Yellen emphasized the need to maintain a highly accommodative stance of monetary policy in light of the disappointing economic recovery. Her comments were broadly in line with what Goldman would have expected, and by-and-large were very similar to statements made by Chairman Bernanke in the past; confirming moar of the same blindness to bubbles, lots of tools, and over-optimism.

Yellen is the head of the San Francisco Fed. There is a lot of misinformation about her on the web, but the fact of the matter is that she is a career academic with absolutely zero banking experience or business experience.

The financial crisis of 2007-2008 has sparked the most intense interest in international monetary reform since Richard Nixon closed the gold window at the New York Fed and devalued the U.S. dollar in 1971.

It would appear that much of the rally yesterday (and early overnight) was driven by hope (and confirmed relief) that Fed chair nominee Yellen is not about to take on a substantially less-dovish tone in today’s testimony in an effort to garner the support of the more hawkish elements of the Senate Banking Committee. There was a great deal of confirmation bias in the market's move and interpretation but, as BofAML notes below, this may be misplaced. The more important part of today’s testimony is yet to come in the Q&A session - where we will hear likely more unscripted thoughts from the QEeen at her Senate confirmation this morning.