Is Janet Yellen a bubble pumper or bubble popper? That’s what some lawmakers wanted to know when the presumptive heir to the Fed Chairmanship appeared before the Senate Finance Committee last week. Considering that the S&P 500 is up 166 percent from the March 2009 lows, some are worried that the Fed’s aggressive monetary policies are far more responsible for boosting stocks than the recovering economy and improving corporate profits. To her credit, instead of pulling out the Greenspan/Bernanke mantra of “we can’t identify bubbles, but we will clean up after they burst,” Yellen said that nobody, including any of the fed officials, wants to go through another 2008 again. While she does not currently see evidence of a bubble-like environment “that threatens financial stability…I think it is important for the Fed, hard as it is, to attempt to detect asset bubbles when they are forming.”
Senator Bob Corker (R-TN), who is no fan of the Fed, Bernanke or the current central bank policies, asked Yellen whether she would have the guts to prick a bubble. Yellen said that the central bank could let the air out of the bubble by employing regulatory measures, like restricting leverage, and, if necessary, it could raise interest rates. Corker interrupted her and asked the money question: With a bull market raging, would you have the mettle to use these unpopular measures? “I believe that I would,” Yellen said. “I believe that is the most important lesson learned from the crisis.”
Bubble popper it is!
The rest of the Senate appearance was pretty much what you would expect: a defense of the monetary policy that Yellen helped create. She said that the Fed’s bond buying program had “made a meaningful contribution to economic growth and improving the outlook” and said that when there has been progress in labor market, the Fed would reduce its purchases.
As the confirmation process continues, investor attention will shift to the current chair, Ben Bernanke this week. He will deliver a major speech on Tuesday night, which along with the release of the minutes from the last policy meeting could contain clues about future central bank actions. Specifically, everyone wants to know whether there are specific metrics that would lead to a change in policy.
While the central bank maintains that the current game plan is necessary, there are risks to the strategy. At every meeting, Fed officials weigh the benefits of quantitative easing (QE) versus the costs, which include managing a ballooning balance sheet and the threat of higher inflation in the future. The Fed’s purchase of mortgage-backed and treasury securities, has so far left the central bank holding $3.86 trillion in assets. Defenders of the policy say that the Fed can simply sell those assets in the future, but doing so could mean absorbing significant losses, since the Fed would likely be selling as bond prices were falling. In theory, the Fed has other policy options, but they have never been tested, which makes economists a bit nervous about their efficacy.
One group not showing signs of nerves is investors. All of the sudden, Mom and Pop are getting back in the game. According to Strategic Insight, inflows into stock mutual funds and Exchange-traded funds are on track for a total of $450 billion for 2013, which would be more than the last four years’ inflows. Of course, the idea that regular people are jumping back in after 56-month, 166 percent bull-run may mean that the market could be setting everyone up for a correction (a pull-back of more than 10 percent). Then again, the technology bull market lasted from October 11, 1990 until March 24 2000, resulting in a 417 percent gain, so maybe the bull has more upside.
MARKETS: For the sixth consecutive week, the Dow and S&P 500 closed higher and at new all-time nominal high levels.
- DJIA: 15,961, up 1.3% on week, up 21.8% on year
- S&P 500: 1798, up 1.6% on week, up 26% on year
- NASDAQ: 3986, up 1.7% on week, up 32% on year (briefly touched 4,000 for the first time since Sep 2000)
- 10-Year Treasury yield: 2.71% (from 2.75% a week ago)
- Dec Crude Oil: $93.84, down 0.8% on week (6th consecutive losing week)
- Dec Gold: $1287.40, up 0.2% on week
- AAA Nat'l average price for gallon of regular Gas: $3.21
THE WEEK AHEAD:
10:00 NAHB Builder Index
7:00pm Bernanke speech to NABE
8:30 Retail Sales
10:00 Existing Home Sales
10:00 Business Inventories
2:00 FOMC Minutes
8:30 Jobless claims
10:00 Philadelphia Fed Survey
10:00 Job Openings and Labor Turnover (JOLTS)