To her credit, former Fed Chair Janet Yellen willingly tossed herself into a vat of hot water this week. She did so with her admission that she was wrong in claiming that Joe Biden’s Build Back Better largesse was not likely to be tempting fate’s appeal towards inflation. You may recall that a number of big wigs, mostly Republican but also former Obama economic advisor and Democrat Larry Summers, were loudly proclaiming that the rescue packages were excessive and inflationary. Yellen defended the administration thusly:
“My predecessor has indicated that there’s a chance that this will cause inflation to rise. And that’s also a risk that we have to consider,” Yellen said of Summers. “I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materializes, but we face huge economic challenge here and tremendous suffering in the country.”
I should point out that Yellen’s mea culpa was not full-throated. She says her error was in underestimating the path and duration of inflation. Yes, she was wrong about that. But her much bigger wrong is one that she does not see and offers no apology for. And that is the fundamental truth that excess supply reduces (or removes) scarcity. And as scarcity is reduced so too is the value of the thing that is no longer scarce. That includes money.
No doubt having the imprimatur of Yellen’s expert view helped get the bills (ultimately) passed. And right there is a good reason to consider what do we mean by ‘expert’?
While most of us are comfortable accepting the idea that the pilots in the cockpit are better qualified to fly the plane than are a random set of economy class passengers and that a professional tailor is going to make you a better suit than you could make yourself, perhaps we are too quick to overlook the fact that when it comes to economics and politics there is a sea of experts – most disagreeing with each other.
Readers of this newsletter may recall that our commentary during the time that various stimulus plans were being discussed (invented) acknowledged the validity of the argument claiming inflation to be transitory. However, we reserved that bit to be only in regard of the portion of inflation caused by supply-chain interruptions. That was a fixable problem. Pouring excess liquidity into the economy was always likely to cause chaos.
The general public has an unfortunate tendency to regard the notion of celebrity as being endowed with wisdom – invariably unearned. Bill Gates has a well-earned reputation in the world of computers and software but what does Bill Gates really know about infectious diseases? Nevertheless, he is given a wide platform to deliver his opinions on both.
This week, Jamie Dimon — who is truly a banking expert – commented that ‘the economy’ is under threat of a ‘hurricane.’ In response, markets sold off on Wednesday. Then bounced back the next day. Had Jamie changed his mind? No. Had traders realized they had over-reacted? Maybe. Meanwhile, down the street at Goldman-Sachs, Goldman President John Waldron said at an investor conference Thursday “This is among — if not the most — complex, dynamic environments I’ve ever seen in my career, the confluence of the number of shocks to the system to me is unprecedented.”
Today, Elon Musk announced he’s trimming employees at Tesla because of fears of darker times. Is he right? How far and wide is his expertise? Only time will tell. Meanwhile, we got a note from Chicken Little. He said he’s reconsidering.
Ron’s Market Minute — A Light at the End of the Tunnel?
Stocks have rallied lately, and yesterday’s rally was one of the strongest so far. We have seen some very tentative signs that the economy might be starting to cool. That has (perhaps) goosed speculation that the Fed might not raise interest rates as much as investors had hoped (feared!) resulting in a short-covering stampede. Over the recent past, investors have adjusted to the Fed acting like the cavalry and coming to the rescue of markets. However, that might NOT be the case this time as inflation is running rampant, but of course time will tell. There is no way to know if the recent low is A market low, or THE market low — a very important distinction — indicating that: Either that the bear market is just getting started, or that it is OVER.
Remember that uptrends are usually made up of strong up-legs interrupted by weaker down-legs. The recent rally created an environment that is very overbought and ripe for a round of profit-taking. When that happens, it will produce the first down-leg following the recent low. The nature of the down-leg and the up-leg that follows will tend to give us hints about the future trend of markets. A bullish scenario would be a mild down-leg followed by another strong up-leg. The most bearish scenario would be strong down-leg that wipes out all the recent gains and (perhaps) takes indexes to new lows.
I note that bonds rallied along with stocks- and especially that junk bonds rallied strongly- perhaps too strongly. A continuation of the advance in junk bonds would be a powerfully positive message for stocks and other risk assets. The recent advance in junk bonds, however, was SO strong that it may take some time to consolidate (even if the market has reached its current bottom.)
At this point markets are still down substantially for the year, and it is quite unclear whether we have reached a bottom. Our risk-management approach has protected our portfolios well this year. And so, a warning – it is not time to throw caution to the wind just yet. The newly emerging light at the end of the bear market tunnel may indeed be the light of day – or it may still turn out to be a freight train. We will likely know more in a week or two.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
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