Weekend Reading: Yellen Lets Doves Fly

Tyler Durden's picture

Authored by Lance Roberts via RealInvestment Advice.com,

As I noted in yesterday’s missive, Yellen’s recent testimony on Capitol Hill sent robots frantically chasing asset prices on Thursday even before testimony began. The catalyst was the release of prepared testimony which included this one single sentence:

“Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.”

And on that statement, doves flew and algorithms kicked into to add risk exposure to portfolios. Why? Because she just said that rates will remain low forever. As my partner, Michael Lebowitz, noted yesterday:

“Per Janet Yellen’s comment, the ‘neutral policy stance’ is another way of saying that the Fed funds rate is appropriate or near appropriate given current and expected future economic conditions. Said differently, Janet Yellen is admitting what we’ve been saying for years – the economy has been stagnant, is stagnating and will continue to stagnate.


If we assume that Yellen is referring to a range of 1.25-1.75% as an appropriate Fed Funds rate, based on statistical analysis of data since 1955, we forecast that real GDP growth rate is likely to average somewhere between 2.00-2.50% for the foreseeable future. For perspective, the graph below plots the range of expected GDP growth vs historical secular (3-year average) GDP growth. In years past, such a slow rate of growth (highlighted in yellow) was considered nearly recessionary.”

The problem, of course, is that a 2% economic growth rate is not conducive to a strongly expanding economic environment and does not support current market valuations. The first chart below compares the cumulative growth rate of the real S&P 500 as compared to GDP. The great “bull markets of the 50’s and 60’s, the 80’s, and now the 10’s have all previously ended when the growth of the S&P 500 exceeded the growth of the economy. 

The next chart compares the inflation adjusted market capitalization rate of the S&P 500 to GDP. As noted on Tuesday, valuations have everything to do with forward returns on investments over the long-term.

The problem for the Fed remains the rising risk of a monetary policy error against a backdrop of an over valued, over leveraged and overly bullish financial market. Historically such combinations have tended not to turn out well.

While markets may well continue to remain bullish in the short-term, the longer-term outcomes remain heavily weighted against investors currently. Of course, the “chase for return” is always the most prevalent when markets remain illogical longer than investors can remain rational. 

In the meantime, this is what I am reading.



Research / Interesting Reads

 “Most investors want to do today what they should have done yesterday.” – Larry Summers

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Looney's picture


Nothing can tarnish Janet Yellen’s G-Spotless reputation.   ;-)


Row Well Number 41's picture

The policy error has already happened, now there is only the delay of the consequences.

brushhog's picture

Forward guidance. Its the police of saying whatever will direct the market where they'd like it to go. So the fed is raising rates but doesnt want to spook the market or prick the bubble. They talk dovish and keep raising, desperately trying to get the rate above 3% without causing a recession before the bottom falls out. Pretty obvious.

Iconoclast421's picture

Historically? There is no historical precedent for this.

silverer's picture

That's for sure. Half a dozen experiments all being run at once. My economics teacher (who really understood economics) from way back would be having a field day with this one.

debtor of last resort's picture

Doves shit all over the place.

CPL's picture

Yes they do.  Let's chant the mantra together:

Die Janet Yellen, die.

Die Lael Brainard, die.

Die Gary Cohen, die.

Die Jamie Diamond, die.

silverer's picture

If you're buying PM's, someday you'll be thanking grandma Yellen for the opportunity to have more time to buy at ridiculously low prices.

Silver Savior's picture

Atleast she is good for something besides being a door stop.

Cordeezy's picture

Loading up on the gold next week!




Silver Savior's picture

Loading up on gold is just about the only thing out there right now besides crypto and silver. Nothing else is worth crap.

Rehab Willie's picture

Get used to it #CalamityJanet

adr's picture

So the economy sucks, and has sucked since 2008, but stocks went on a record breaking run. 

In fact the worse the numbers got, the more stocks rallied because that meant more free cash for connected investors. 

In reality the owners of The Fed just printed themselves Trillions in cash to buy everything they wanted and corporations used the money to buy back shares, paying the 1% to fuck over everyone else. 

Small Government Is Better's picture

Gee!  Those were doves?

I thought they were farts!