I couldn’t resist thinking back to Fed Chair Alan Greenspan while
observing Federal Reserve Chairman Janet Yellen during her two-day
testimony to the Senate Committee on Banking, Housing, and Urban
Affairs and to the House Committee on Financial Services.
Greenspan would deliver on the first day of his testimony a
particular economic and market slant. On the second day, he would
offset the tone he used on the first day of his testimony, which was
a full two-day performance.
Yellen demonstrated in an unequivocal way that also at the Fed,
times have changed. She “condensed” the Greenspan-like two-day
even-handed approach into just one session.
Time will tell which communication approach of the two is best for
communicating with politicians and the public in general.
It is really interesting to see how the Fed chair in her testimony
first says: “If economic conditions continue to improve, as the
Committee anticipates, the Committee will at some point begin
considering an increase in the target range for the federal funds
rate on a meeting-by-meeting basis.”
And then, while continuing,
she says in precisely in the next three
phrases: “Before then, the Committee will change its forward
guidance. However, it is important to emphasize that a modification
of the forward guidance should not be read as indicating that the
Committee will necessarily increase the target range in a couple of
meetings. Instead the modification should be understood as
reflecting the Committee's judgment that conditions have improved to
the point where it will soon be the case that a change in the target
range could be warranted at any meeting.”
Please don’t take me wrong as I don’t want to criticize the Fed
chair as she has an extremely difficult task.
But — and this is strictly personal — I’m afraid her wording in her
testimony appears to me to be another example of “argumentum ad
absurdum” (Latin: argument to absurdity), which is a form of
argument which seeks (a) to demonstrate that a statement is true by
showing that a false, untenable, or absurd result follows from its
denial, or (b) in turn demonstrates that a statement is false by
showing that a false, untenable, or absurd result follows from its
acceptance.
It looks to me that’s not an optimal form of transparent,
understandable and non-confusing communication.
I’m afraid the Fed has boxed itself into a corner.
I would certainly stay away from saying: “The Fed’s path to
tightening is so far so good,” because it isn’t.
When you are in the markets on a daily basis, you get that
unpleasant feeling (at least I do) that “something is brewing.”
In this context and certainly as a long-term investor, I’d pay
attention to what St. Louis Fed President James Bullard said in an
interview with Reuters under the title “Fed’s
Bullard warns over sharp ‘wake up’ call in markets.”
He said: “There is a disconnect between markets and the Fed
and that is going to be reconciled at some point. And I am a little
bit concerned that one day markets will “wake up” and “reprice
everything.”
In simple words: “Something has to give, that’s for sure, but we
don’t know how big it will be and when it will occur.”
I’d like to add here and in the context of portfolio management of a
long-term investor who has the intention to sell some of his/her
investments in order to cash in some profits, I think it may be a
good time to check in a serious way if the “exits” you will be
obliged to take (generally spoken, forget choosing your exit!) when
abrupt repricing, caused by the markets and not by the central
banks, takes place (expect it could and probably will occur
abruptly!) will have sufficient capacity to execute your sell
order(s).
It’s as simple as that. In case you’d run into trouble selling, it
could turn out as a devastating blow to the value of your
investments in case markets get into a panic mode, which is a
classical pattern in these kind of events.
I don’t expect this time will be different.
Never forget, when panic mode is dominating markets (it doesn’t
matter which market), the well-informed, long-term investor has the
means to be a buyer and not a seller.
About the Author:
Hans Parisis
Hans Parisis is a regular contributor to the Financial Intelligence
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