Wednesday, June 18, 2014

Mum shoulda been the word...

The stock market liked what it heard from a tactically improved Janet Yellen during today's post Fed meeting press conference. This time there was no market-shaking "6 months" answer to any "when do you think you'll raise interest rates?" question. The newbie Fed Chair basically reaffirmed the status quo amid some evidence that the job market and the rate of inflation might be crossing the Fed's lines in the sand sooner than the second half of 2015. Which, I suspect---as we've already seen on the unemployment number---would simply result in the kicking of sand over the old lines and the drawing of new ones further down the unemployment rate and up the inflation rate charts.

I imagine Ms. Yellen is feeling quite good about the Dow's 100 point response to today's media event. Because, clearly---while supporting some stated level of stock prices is not to be found in the Fed's mandate---they fret over the stock market. Where, ironically, Ms. Yellen may end up regretting one of her responses was her assessment of present valuations. When asked if the stock market is trading outside historical norms, she replied: "I still don't see that for equity prices broadly."

Now, I happen to agree, "broadly", but I can say that. I can also say that I think stock valuations are broadly expensive when I believe such. As for Ms. Yellen, on the other hand, can you imagine some future press conference---the whole world with a 401(k) watching---where she says she thinks stocks are broadly expensive? Me neither. In fact, in my view, while I understand the Fed considering equity valuations in their overall analysis, the fact that they know their comments can move markets ought to be incentive enough to simply plead the fifth when someone asks about valuations---unless, that is, they're willing to disappoint as well. Besides, given the Fed's poor track record as an economic forecaster, and fundamental analyst, (yes, I'm alluding to the Greenspan Fed's mismanagement of monetary policy leading to the credit bubble, and I might add Ben Bernanke's Great Moderation speech of 2004)---let alone a financial market forecaster---you'd think they'd stay way out of that fray. The honest response would be "we're just not very good at asset valuation, or forecasting markets".

Ah, but now that she's gone and done it---come a day when the S&P's trading at 25 times earnings and she's asked what she thinks about valuations---she'll have to choose her words very carefully. While I don't believe that the Fed---the doves anyway---minds in the least receiving credit for the present bull market, make no mistake, they'll be desperate to elude the blame for the next bear.


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