What Janet Yellen Means For Investors

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October 17, 2013 4:06pm NYSE:TBT NYSE:TLT

Janet YellenTony Sagami: The Federal Reserve chopped short-term interest rates to effectively zero on Dec. 16, 2008.


However, zero interest rates didn’t stimulate economic growth. Because the Fed couldn’t reduce rates below 0%, Ben Bernanke and his Fed friends had to find new ways to goose the economy.

That’s how we got programs like “Operation Twist” and “Quantitative Easing.” I know they’re hard to keep straight, so here is a quick rundown.

  • Quantitative Easing #1: Between December 2008 and March 2010, the Fed spent $1.45 trillion buying toxic mortgage-backed securities from Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks. They also bought $300 billion of long-term Treasury securities.
  • Quantitative Easing #2: From November 2010 through June 2011, the Fed spent a total of $600 billion to buy long-term Treasury bonds.
  • Operation Twist: From September 2011 to December 2012, the Fed spent $667 billion to buy bonds with maturities of 6 to 30 years while selling bonds with maturities of less than 3 years. The goal was push long-term interest rates downward.
  • Quantitative Easing #3 (aka, QE Infinity): In September 2012, the Fed began monthly purchases of $40 billion in agency mortgage-backed securities and $45 billion of longer-term Treasury securities.

All that twisting and easing pushed the Fed’s balance sheet assets up to almost $3.8 trillion as of Oct. 9. This already-staggering amount will keep growing by an additional $85 billion every month until the Fed starts “tapering.”

Janet Yellen: More of the Same!

With President Obama’s nomination of Janet Yellen as new Federal Reserve Board chair, the Wall Street crowd knows it can expect more loosey-goosey monetary policy.

Yellen, a Democrat, is another monetary “dove.” She has consistently supported all Bernanke’s asset purchase programs.

Yellen is a dyed-in-the-wool Keynesian. She earned her doctorate at Yale in 1971. She studied under Nobel laureate James Tobin, who advised presidents Kennedy and Johnson. Yellen embraced the Depression-era strategies of aggressive government action to reduce unemployment and spur economic growth.

Under Yellen, you can expect more debt … more money-printing … more government intervention … and more kicking the monetary can down the road.

As an investor, what does Yellen’s nomination mean to you? I expect four major effects:

  • More Bubbles: Asset prices — including stocks and real estate — will keep rising. The old “Don’t fight the Fed” adage is still good advice. Stocks and other risk assets will be volatile but will also trend higher.
  • More ZIRP: The Fed already promised to leave interest rates near zero until 2015. Yellen will probably push that out even longer. Income-oriented investors should get used to the “new normal” (pathetic) fixed-income returns.
  • More Inflation: The Federal Reserve has a dual mandate to foster maximum employment and price stability. Yellen, like Bernanke, is as blind as Mr. Magoo about inflation threats.
  • More Pain: Most dangerously, even super-dove Janet Yellen will have to take the Fed’s foot off the QE pedal eventually. The stock market’s negative reaction will be painful and last a very long time.

Enjoy the stock market ride while you can — but plan now how to deal with the next bear market. You have two options:

Option #1: Do nothing, get clobbered, and wait 2, 4, 6 or even more years to get your money back. Most people think they can ride out bear markets … but history shows they will panic and sell when the pain gets to be too much.

Option #2: Have some kind of defensive strategy — market timing, portfolio insurance and protective stops — to avoid the big downturns.

Enjoy the new Janet Yellen party … but watch out for the nasty hangover.

Tony SagamiThis article is brought to you courtesy of Tony Sagami

Money and Markets is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customizedinvestment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Money and Markets or its editors.


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