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3 Reasons Why Catastrophe Will Be New Fed Chair Yellen's Legacy



January 07, 2014 – Comments (1)

Yesterday, Janet Yellen was confirmed by the Senate to be the next Federal Reserve Chairman. History will judge her to be the one holding the markets...

Yesterday, Janet Yellen was confirmed by the Senate to be the next Federal Reserve Chairman. History will judge her to be the one holding the markets reins as the next mega stock market bubble collapses. It is somewhat unfair she will be blamed almost entirely, as a majority of the damage will have been inflicted by her predecessor Ben Bernanke. However, she has always been as dovish, if not more than him, never dissenting.

The bed for the United States and world has already been made. At this stage it is just degrees of bad that Janet Yellen can control. How much more money is printed? How much higher does the stock market go as the bubble inflates? How much more debt will the U.S government take on and how much higher will the balance sheet of the Federal Reserve go?

Top 3 Reasons This Market Will Collapse In 2014-15

1. The Federal Reserve Balance sheet has risen to over $4 trillion. The Federal Reserve is still planning on printing $75 billion every single month going forward. As the economy continues to improve, inflation is going to jump (this always happens with a better economy, even ignoring the massive printing of money that has been done). History has shown us that when inflation starts, it is very hard to control. A good example is China in recent history. In addition, never in history has this much money been printed.

2. Rates are going much higher and soon. We have already seen the 10 yr yield surge above 3%, up about 100% from its recent lows. As much as the Federal Reserve wishes it could control rates, there will be a breaking point where the flood gates open (it likely started already).  Rising rates will put a major halt to economic growth as the borrowing of money becomes too expensive for most. Housing will take another hit as well. This means higher unemployment and lower economic growth...just as the economy was starting to do better.

3. The stock market will crash. The stock market has risen 150% off the 2009 lows (without any major corrections) partly because the world is not ending but mostly because the Federal Reserve has been there to backstop any negatives with more printing of money. That money has artificially deflated rates causing money to flow into the stock market. The bottom line is that the market is on a drug called QE. There is no fear of anything because the market feels the Federal Reserve will always be there to bail it out. As the Federal Reserve lowers the amount printed, the market will stall in these upper levels (starting to see that now). As rates rise and economic activity start to stall out later in 2014, the market will hope for more intervention from the Federal Reserve, however quickly realize the Federal Reserve's former tactics will not work. This is where the major freakout will happen. Imagine drug withdrawal.

As Janet Yellen takes control of the Federal Reserve, the markets expect more of the same. While the bed has already been made, she will likely make it worse by continuing to feed the drug of QE into the market and economy. There is only disaster waiting at the end of this ride. There is no way you can print over $4 trillion dollars and not have some negative overdose down the line. The markets are priced to perfection and the dark clouds can be seen on the horizon. The Federal Reserve portrays itself as having the ability to always control the outcome. However, we clearly know from history this is not the case. Beware the bubble collapse cycle which hits in mid 2014-15.

Gareth Soloway

1 Comments – Post Your Own

#1) On January 07, 2014 at 4:15 PM, awallejr (56.95) wrote:

Well since you have been basically wrong with your macro predictions, I am confident you will be again.

With respect to inflation, show me how wage growth is going now.  Since GDP is 70% spending and with stagnant wage growth for most workers, general demand has been and will continue to be weak. Gold's collapse told you this.

The market already collapsed back in 2008/9.  And depends where you pick your point but the market is ONLY up about 16% from the 2007 peak. Also don't forget that almost 20% correction back in 2011.

I know libertarians will disagree with this but I think Ben Bernanke deserves the Congressional Medal of Honor.  I know I would be in a world of hurt now if it wasn't for his aggressive actions. As for Yellen I am counting on her continued dovishness.

The thing I am concerned with regarding the end of QE is the removal of money from the economy since interest payments on the MBS and Tbill holdings will accomplish that.

Had I listened to your doom and gloom blogs last year I would have never made the money I did.  The first time I made more in the stock market than I earned for a living, and I gross in the six figures.

The only thing "we clearly know from history" is how bad you are at prediciting.

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