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Only Fools Still Hang on Yellen’s Every Word

By Rick Ackerman Posted on August 25, 2014, 12:01 am EDT Last Updated August 27, 2014, 10:32 pm EDT

Who would have believed when the Great Financial Crisis was winding down five years ago that the feather merchants, unrepentant as always and eager to make up for lost time, would be right back at it, erecting an even bigger, shakier house of cards?  A recent Wall Street Journal headline offers a hint of their dubious success so far: “With Rates Low, Firms Near Borrowing Record.”  Fresh evidence that epic malinvestment is more robust than ever would be scary enough by itself. But to make matters worse, Wall Street and the news media, if not the American public, continue to treat the architects of the next crash with fawning deference and respect, hanging on Janet Yellen’s every word as though the patronizing blather she spews each week to “manage our expectations” were somehow of great import.

Same Old Story

To underscore the point, the stock market erupted into the usual, embarrassing histrionics last Friday when the Fed’s latest double-speak hit the tape. This, despite the fact that the Open Market Committee’s most recent minutes did little more than reaffirm that the Masters of the Universe plan only to perpetuate the status quo. Interest rates will have to be raised at some point , we were reminded yet again, but the economy is not quite strong enough for it yet.

Give the Fed and its shiftless, stupid lackeys in the news media credit for holding our attention with such drivel for as long as they have.  It is a tricky balancing act, to be sure, since it requires the banksters to aggressively promote the lie that the economy is just a few widgets shy of booming even though a majority of Americans polled on the subject believe the Great Recession never ended.  The reason this stark paradox can persist is not difficult to fathom: The stock market is trading at record highs. How bad can things be, many are surely wondering, if stocks seem only to move higher and higher?

Buybacks Drive Bull

Never mind that a key component of the market’s strength lies in the steady buyback of shares by exchange-listed companies themselves. And why not?  They are able to borrow nearly unlimited sums for this purpose at little or no cost, and therefore to keep earnings on an upward slope without the effort it would take to actually grow a business. This ostensibly virtuous cycle is Wall Street’s version of a perpetual motion machine, and it has helped spawn bond-related borrowing in the U.S. approaching $1 trillion so far this year. Keep in mind that U.S. corporations are already running  a cash surplus of $2 trillion, so it’s not as though they need the money. The result is malinvestment on a colossal scale, and if you think it will end other than badly, then I’ve got a bridge to sell you. Hard-core deflationist that I am, my prediction is that the $2 trillion will never be “actualized.”  Ultimately, it is a daisy change of hyper-leveraged collateral, no more a repository of wealth than inflated home values.

Do not imagine for a moment that when this gargantuan gas-bag of economic hubris springs a leak and starts to deflate, the exalted Ms. Yellen and her cronies will know what to do. They are just winging it now, hoping to muddle along until the economy picks up steam. How much more mileage can they get from that story? In the meantime, the spinmeisters can count on a credulous, economically ignorant press to fail to notice that the recovery at this point amounts to a fading boom in car leases and the creation of 200,000 McJobs each month.  If that translates to GDP growth of 2.9%, the latest revised figure for Q2, then perhaps the genuine prosperity that has eluded American workers for decades really is no more than a few widgets away.

  • gary leibowitz September 1, 2014, 8:02 pm

    Reading the pulse of the market we can very well find a top of some sort at 2019 on SPX. That would fit perfectly with Rick’s system, even though he himself was very reluctant to trust that number. Me, I just might try to pick the top if it hits that number at a close. I still see a possibility of 2070 as the top most range. Given the fact that we are overextended and the mood is getting more positive each day, we could have an interesting Sept/Oct. My guess is October is the breaking point. A 20 percent drop or worse? I currently favor the 20 percent variety followed by new highs come election. If that were to happen there would be a whole lot of frustrated bloggers having to wait that long. In any event the market’s inflation seems to fit with yet another bubble that needs popping. I still think the consumer will step up and swing away before the fateful event. For those reliving the visions of a Cataclysmic crash it might seem like an eternity. I do believe the vision can truly be a warning. The murkiness of a timeline is almost as bad as not having that vision to begin with.

  • mava August 30, 2014, 8:25 pm

    But, I liked your general point that regardless of what it is, an investor should try to not “right the thing”, and just seek to make profits. This is a very capitalist approach.

    • gary leibowitz August 31, 2014, 6:29 pm

      You right perceived wrongs by the use of your single vote and your participation in organizing others to vote your way.

      Are YOU not making money in all this? SHAMEFUL!

      Investing has got to be unemotional. You seem to think that’s not true. Perhaps you would make more money if you followed my advise.

      Philosophical discussions should be done in a forum that doesn’t involve investing.

      Love your argument that wipes out the human suffering by men,woman, and children during the golden age of no unions. Are you for real? That’s like saying blacks never had it bad. No two sides? Always black or white? You dismiss hundreds of years fighting for balanced economic control with your blithe statements.

      Where are the rational thinkers? Everyone uses their own snippet of experience or situational events and magnifies it to encapsulate the whole truth. Empathy is replaced with personal injustice. As if that really tells the story.

      From a person that profited from the Great Depression there would be no talk of extreme disparity of wealth, only anger over the wasteful government spending and increased taxes. Try and expand your argument to include things that are real and outside your experience.

      Sorry if I offend your sensibilities on my ability to filter out emotional baggage from investing.

      • Jackson September 1, 2014, 3:14 am

        Gary, I enjoy your posts and agree on the majority of your opinions.

        I felt the need to say that because so many here disagree with what you say.

        I understand its hard to argue with people who their only come-back is “just wait”. Expect more of the same.

      • mava September 1, 2014, 5:09 am

        Gary,

        No you didn’t offend my sensibilities. I don’t think I have any, actually, so that might not have been all my achievement. No worries, anyway.

        As always, I completely disagree with everything you said in this last post of yours.

  • mava August 30, 2014, 8:22 pm

    So are Unions needed? Maybe, if they were doing the right thing. For instance if all they did was peacefully organize workers, to quit the job together. But this is not what they do. They stop production, while using government violence to not be replaced together, they force other workers to join, they prevent entry into workplace if not a member. I was stopped once by the union from entering the store! (I since use checkout machine whenever possible).

  • mava August 30, 2014, 7:42 pm

    Capitalism has only a good side, Gary. Unless, of course, you going to decry the lack of theft as a negative.

    Moreover, many other thing have only a good side. The lack of unions is only good thing. Unions have only bad side. Its not exactly a duality, my friend.

    What you saying is if I am cooking you on a campfire, it has two sides, its good for me but bad for you, and that’s our system. That is no system at all, that is how animals live.

    If I get Union paycheck, that is money stolen, violently beaten out of people, that’s me cooking you on a campfire.

    • gary leibowitz August 31, 2014, 6:04 pm

      If Unions were so bad how do you explain economic growth and it’s correlation to the health of Unions. To dismiss the reasons for Unions is like dismissing the Holocaust during World War II. Sorry but the Robber Barons have been replaced by corporations that now own the political landscape. You rail against low wages and corporate greed but want the employees to be at their mercy. You are getting your wish today. Union participation is at a low not seen in 50 years. Membership is below 11 percent today where in early 80’s it was 20 percent. I would say a halving of the membership is a real good thing. Why just look at the freedoms corporations now have to pass on that onerous burden of union wage and benefit restraints. Yup you certainly proved your point! You use arguments with absolutely no bite to it. Show me some study that shows Unions were bad for the economy. Please! In fact every single study I have found shows the EXACT opposite. These studies must be flawed or written with an agenda. Yeah that’s it!

      I can’t for the life of me understand why YOU aren’t jumping for joy over the current situation. You are getting everything you want. Destroy government job growth (done), destroy Unions (done), cutting money to the poor, such as food stamps (done). So why is it that you expect this economy to tank even further?

      BTW, get back to me on some meat to your argument that Unions are bad.

      • Oregon September 1, 2014, 6:10 am

        “Show me some study that shows Unions were bad for the economy. Please!”

        Detroit.

        &&&&&&&

        Detroit finished first in another dubious category: Over the course of its slide into oblivion, the city and its school system received more federal aid than any other. RA

      • gary leibowitz September 1, 2014, 7:27 pm

        Are you actually blaming Detroit’s problems on Unions? Blight, flight and crime aren’t the biggest factor? Manufacturing jobs are a tenth of that it was. Automation and the very heavy dependency on the auto industry made for a booming economy in the 20’s where it was the fourth most popular city. That dependency on a few manufacturing sectors, combined with the inability of the city to transition to keep up with the times is also a major contributor.

        Stick to the facts and it is clear Unions weren’t the problem but rather the scapegoat. Retired general city workers, such as librarians or sanitation workers, and auto workers received average payments of $18,000 per year. Cops about 34,000 where a Red City like Dallas receives 35 percent more. There are 3 times the number of retires than current workers. Do the math and tell me the blame is on Unions.

        Those LUSH union pensions of 20,000 or even 34,000 for the cops and firefighters sure is reason enough to ban unions all together. Unions were never needed since our corporate benefactors were always so generous. Why look at how well they treat their workers today, when the need is greatest. The mention of unions or pensions to the private sector are words that have lost their meaning. Now you attack the last bastion of safety, government jobs. Scapegoating? You bet your arse! But don’t fret, government union jobs are now on the decline.

        If we get rid of all agencies that represent the worker what would our standard of living look like? Last year we hit a 97 year low in union membership. In 1953, the touted golden era, we had 35 percent private sector membership. Is there a correlation between good times and bad for the average Joe? All I know is that the stats seem to fit like a glove.

  • Redwilldanaher August 29, 2014, 5:36 pm

    Even Trumka has trashed the economic response and the “results”. Seems like you’ve been a closet corporatist masquerading as a populist after all.

    It’s a Ponzi scheme, jackass. It has all become a Ponzi scheme.

    • gary leibowitz August 30, 2014, 7:35 pm

      Ponzi scheme? Well I would suggest that the stock market has always been a Ponzi scheme in your definition. Take the decade of the 70’s. High inflation, very weak job market, 40 percent drop in 18 months. The Feds monetary policies of huge budget deficits that were supported by political leaders were the cause. Not much different in the 80’s and 90’s when financial greed ran amok. Bank failures shot way up in that time period.

      In fact the stock market since its inception can be viewed as a Ponzi scheme. But in all that time you could have made huge gains in your investments despite the obvious corruption with political backing.

      So what exactly is your point! Me, I see all things as they are, not as I wish them to be. Unions have 2 faces to it yet if you now receive pension benefits you would gladly dismiss the down side. No system or institute is all good or bad. Capitalism has always shown the two extremes. This is our system. To pretend its different this time is ludicrous. It might have a more lasting consequence once it turns down, but that doesn’t negate the long standing process. Boom/Bust happens because of human frailties. We go thru emotional extremes. Everyone loves to cite the period of accelerated growth, but never puts it in the context of the whole cycle. The events that preceded the expansion was never good.

      Keep it real!

  • gary leibowitz August 29, 2014, 5:27 pm

    The Fed policy speeches has been consistent with what they have done. QE and its eventual withdrawal is happening as outlined. Housing and wages still a way to go before we see rates pick up. They have indicated it could start mid-2015. I see no reason to think they are lying. Corporate balance sheet adjustment combined with high productivity and low costs has created a perfect scenario for steady profits. Corporate buybacks is most likely a sign that companies feel their best investment and return would be on themselves. Economic indicators are certainly improving enough to reinforce this view. You can’t wish away 6 years with dozens of excuses why companies are making money. The external factors have also made most here believe a cataclysmic Armageddon has started. You grasp for reasons to fit your assumptions even as the years have proven them wrong.

    There are signs that we are approaching extremes in valuations, but that doesn’t necessarily equate to a crash nor to an economic reversal. If you look at the relationship between wages and salaries and the market cap, it’s around 3.5 times. The last time it was higher was in March of 2000, and October 2007. Either wages have to come way up or valuations down. I suspect a bit of both as we go forward.

    All this is happening in a world where human suffering and potential economic collapse of countries is likely. If you look at where one puts their money to work there are few options. Returns of stocks have far outpaced any other vehicle these past 5 years. The yield on our bonds are not a fluke, nor is it being manipulated. Safe haven to park money is landing here. It is the best of bad options.

    • allen42 August 30, 2014, 3:40 am

      The peanut gallery speaks again blah blah blah blah.and blah blah blah

  • bailintheboat August 28, 2014, 8:50 pm

    From the beginning people should have realized that she stood for two things. Higher inflation does not frighten her. Labor markets, wages, should be controlled. In the past has suggested that wages should be controlled. Pure socialist monster, sweet little old lady.

    It takes 30 seconds to see her message would be a confused garble, but somehow people see sense in it. They do not know what they are going to do until the information they prefer to use comes in. Were using employment figures for decisions? A lagging indicator? Took them two years to figure out that doesn’t work so well.

    Complete socialist through and through. Why don’t people see that? They are all living in the same forest. Lured in over time, without much in the way of a white pebble or bread crumb trail to lead them out. Men like David Stockman, Rick, you and I doing our part, realizing all the while that it is likely a younger generation than ourselves that will be put upon to solve the problems, to clean up the mess.

  • mava August 28, 2014, 6:00 am

    Wow, I miss one month and the whole board is dead quiet!? What had happened here? RA, did you ban literally, everyone (but some still squeezing in)?

    Wednesday and 6 (SIX!) comments? Did everyone sold off and gone to the shelter? What am I missing here?

    Did NSA found this place and announced everyone who posts here goes on a no-fly list? WTHH?

    Well, be what it is to be, but I find your article to the point and correct. I don’t believe Yellen, it would be funny to!

    &&&&&&

    Only Vlad has been banned, Mava (although the loathsome little shitwad — and the emphasis here is on “little” — continues to send a couple of rants my way each day. They get filtered directly into trash so that I don’t have to look at them). Concerning everyone else, who knows? I’m in the trading and forecasting business anyway, so a lull in forum activity is like a vacation — especially when Gary has gone quiet. RA

  • Jason S August 26, 2014, 9:38 pm

    I don’t understand why people still hang on to the words of central bankers after years of their proven ineffectiveness. The US is bad enough, but look at Europe. The Europe 350 ishares are up 68% since June 2012, yet those economies continue to flounder.
    http://www.economist.com/blogs/graphicdetail/2014/08/european-economy-guide

    Japan is a dumpster fire working on engulfing the world, yet their Nikkei index is pushing multi-year highs despite an unexpected contraction of 1.7% in their gdp.

    Only money can fuel this global asset growth and for it to grow despite the folly of investing in times when the growth prospects are anemic at best indicates that money is being created hand over fist. Yet we somehow also believe the central bankers’ inflation numbers.

    All these managers who are playing with other people’s money are going to lose on an epic scale. They are playing the moral hazard game thinking that the central bankers will bail them out again. To quote Top Gun, “Son, your ego is writing checks that your body cant cash.”

  • Craig August 25, 2014, 7:58 pm

    Rick,

    What is this that I hear, you and Gary are in negotiations for you to sell him a bridge or something?

  • thebeek August 25, 2014, 7:28 am

    Debt the currency of slaves. Debt leverage derivatives ‘ease’ments, counter party risk. These things are all held so lightly, I suspect people sense that they can drop them like either a hot potato or something light as a feather.

    Recently came to understand that less than 1% of money flows reflected actual commerce, whereas the balance is tied up in higher finance, (evidently established to facilitate such trade) That quadrillion number is not part of this picture!

    Can’t wait to witness all the New York Natives coming to collect against said roots of such economy. They’ve been slick at degrading it for decades now… Less wonder the demoralizations leading up to WW11. The thugs from on high squeezing mortgage (debt) positions from those below.

    This is what Yeller will try to avoid at all costs on her watch. Her hair is already going blue grey in the process. Poor girl, thinks/thought she has/had the power.

  • John Jay August 25, 2014, 6:02 am

    It’s all just part of the show, pretending we still have a functioning Democracy, Free Markets, and a vigilant Justice Department.
    We don’t.
    What we have is a Thug Government, a Thug Populace, with Thug Corporations.
    A Thug Hat Trick!

    All one can do is carve out a little piece of sanity for yourself, your friends and family.
    The rest of the world seems to be in even worse shape than we are.
    France has an economy that is now almost 60% Government of some sort.
    Japan has their CB outright buying stocks to delay the final collapse.
    Also take Fukushima.
    Please.

    MENA?
    Chaos and escalating violence
    South America?
    Same old same old of defaulting on their Government Bonds.

    As I have continued to argue, I only hope the Fed can hold it together here.
    A collapse will mean unimaginable suffering and death, never before seen in the United States.
    ZIRP and NIRP are better than what I am seeing happening to those poor Ukrainians being shelled in their Civil War.
    Our military already has plans to use snipers and indirect fire weapons (mortars) on us if we protest in any great numbers.
    Go ask Alice, know what I mean?

  • Steve. W August 25, 2014, 12:49 am

    The bigger problem is that the Ignorant won’t know what’s going on until the next major market meltdown starts and once we are knee deep in s**t, the Ignorant are going to go back to the people who got us into all this mess to solve the problems, instead of asking those of us who have been sounding the alarm for years.


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