Ms Yellen, YOU Are the Problem!

Federal Reserve building with twenty dollar bill on grunge textu

Sometimes I see a comment from someone that makes me wonder about their frame of mind.
Are they really so dumb that they can’t see the consequences of their own actions?

I’ll show you what I mean. Here’s an extract from an article on Bloomberg yesterday. It’s a report on comments by US Federal Reserve Chairwoman, Dr Janet L Yellen:

“I would highlight that equity-market valuations at this point generally are quite high,” Yellen said in response to a question. “Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

Those comments really are astounding.

The Fed keeps interest rates close to zero for more than six years, yet the Fed chief seems unaware why bonds and stocks are so high.

Perhaps if the Fed hadn’t kept rates so low for so long, the problem of high asset prices wouldn’t exist. Or, at least, if asset prices were high it would be due to company and market fundamentals, rather than central bank manipulation.

I feel like sidling up to the Fed chairwoman quietly and shouting into her ear, ‘Ms Yellen, YOU are the problem!’

This is just more evidence of what the Fed is up to. The Fed doesn’t want to cut interest rates below zero, and it doesn’t want to print more money…yet.

Before it does that, it wants to see if it can move the market with words rather than actions.

The Reserve Bank of Australia is up to the same game. The RBA has cut interest rates to 2%. It could go further. Several central banks in Europe have cut their rates near to zero, to zero, and even below zero.

There’s no reason why the RBA won’t do the same here if things get bad enough.

Certainly, a Cash Rate of 1% by the end of next year is firmly on the cards now. That would only take four quarter-percentage point cuts.

And considering how markets have responded to Tuesday’s cut — bond yields up, stock market down, and the Aussie dollar up — the RBA’s rate cut has been a complete waste of time.

As my old buddy Greg Canavan said, the RBA would have been better off not cutting rates but declaring that they were keeping open the option of a rate cut in the future.

That would at least have given the stock markets some hope…and more importantly, it would have pushed the Aussie dollar lower…rather than pushing it higher.

While we’re on the subject…

Aussie dollar keeps moving up

Remember that there’s a currency war going on. The aim among the world’s central bankers is to devalue their national currencies as much as possible.

Why? In their simplistic, bureaucratic, and academic world, a lower currency means more exports, and that will boost the economy.

In isolation that may be true. But no economy ever operates in isolation. It also doesn’t factor in the impact on import costs.

For instance, if an Aussie manufacturer has to import components for use in exported goods, their costs will rise. The rising costs may even offset the benefit of the higher export dollars.

Not only that, the bureaucrats also assume that the economy has goods and services it can export in order to benefit from the exchange rate.

Australia’s biggest exports are commodities. Those prices have slumped. Even though there has been a partial rebound since January, you’re still looking at prices much lower than they were 12 months ago.

Crude oil has probably been among the best of a bad bunch. It’s now at US$60 per barrel, up from the low of US$42 just a couple of months ago.

Iron ore has done well too. It’s now US$60 per tonne, up from US$47 per tonne in April.

Although iron ore miners shouldn’t get too excited just yet. According to the Australian Financial Review:

However, UBS has suggested prices could resume their fall and plumb the depths of $US45 per tonne in the second half of the year.


The commodity price rebound will help. It will help one commodity in particular, as resources analyst Jason Stevenson explains here.

But these improvements in commodity prices have been partly offset by a rebound in the Aussie dollar.

I’ve circled the approximate time when the RBA cut rates…apparently to knock the Aussie dollar down a peg or two:

Source: Google Finance

Click to enlarge

Double oops!

Waiting for the ‘Long Depression’ to strike

Is it too early to buy?

It is if you think this is the beginning of another major slump in stock prices.

OK. So, do I believe this is the beginning of another major slump in stock prices?

No, I don’t.

Although I have to say, after four years of telling investors to ignore all the fake crises, it’s getting harder and harder to ignore them myself.

When the market collapses again, it will be messy…very messy. You’re talking about the potential for a long depression, where stock prices collapse, and then slowly grind lower and lower for year after year.

Forget the 2008 crash, the dot-com crash, or even the 1987 crash. This will have all the hallmarks of the depression of the 1930s and 1940s.

It will be bad. But even though I know that’s inevitable, I still figure the world’s central banks have some fuel left in their tanks. And they will do more to boost asset prices.

Yes, stock prices in the US have tripled since the 2009 low. But the Fed and other central banks haven’t exhausted their options when it comes to interest rates and money printing.

That’s especially true of central banks such as the RBA and the People’s Bank of China.

In short, you should be aware of what’s coming, plan for it accordingly, and even make specific investments in preparation of it. But a major market crash in the near future?

I’m not prepared to bet on that outcome yet.


Kris Sayce,
Editor, Tactical Wealth

Ed Note: This is an excerpt of an article originally appearing in Port Phillip Insider.

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Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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1 year 5 months ago

I’m still waiting for gold to hit $5,000. When it got to $1900 a few years ago we were “advised” it was heading further upwards and to keep buying.

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