investment community was waiting on the edge of their seats for Chairwoman
Janet Yellen to make an announcement on March 18th at 2:00 PM in a
news conference. They were all waiting
to see if the word “patience” was removed from the Federal Reserve’s
statement. And not to disappoint the
investors Yellen did announce that the word “patience” was removed from the
statement (meaning that the Fed would not be eager to raise rates, but would be
patient). However, that announcement was
followed by long explanations about the fact that if the Fed did move to raise
rates the rate increases would be very slow.
worldwide investment community was anticipating the removal of the word, the
stock market was down over 100 points on the DJIA at 2 PM as the announcement
was made. Virtually every investor
(large and small) were “chomping at the bit” to sell equities if they detected the
removal of “patience”, since that meant to them the “removal of the punchbowl”
the Fed was supplying to the investment community over the past 6 years. Those were the years the Fed pumped trillions
of dollars into the U.S. economy driving up stocks, bonds, and real estate as
well as supporting the economy.
were satisfied that the stock market would continue declining as the word “patience”
indicated that the Fed’s use of the word meant that the Fed would wait
patiently no matter how fast the economy grew before they raised interest rates. Also, each time they removed their
Quantitative Easing during the past few years, the stock market fell as a
consequence of the tightening, only to rise again as another QE replaced the
one that was stopped.
soon as Janet Yellen started her speech, she made it as clear as possible that
even though “patience” was removed from the statement, she went to extreme
measures to show investors that the Fed would not be raising rates anytime
soon. She started by explaining that the
dollar rose 20% over the past year and the Fed was watching the dollar very
closely. The path of least resistance
would be higher for the dollar and that would hinder inflation moving up to the
Fed’s mandate of 2% and could help to generate deflation. The dollars’ rise could also hurt the
earnings of multinational U.S. companies that export goods abroad. She also stated that the Fed lowered its
projections of future GDP and other economic data to make it abundantly clear
that the Fed would not raise rates anytime soon.
This was all
to allow these same investors who were still on the “edge of their seats” to
relax after giving them a clear signal that when it comes to raising rates,
they would be even more “patient” than when the word “patient” was included in
the Fed’s prior statements. This started a reversal of the stock markets
all over the globe. We went from down
about 150 points on the DJIA to plus 227 points. It was incredible to watch Yellen manipulate
the greatest investors in the world to do exactly what she planned.
amazing thing, as far as Comstock is concerned, is the fact that almost all
investors are ready to move with whatever Ms. Yellen says and follow her as if
she were omnipotent. In the past 20
years the Fed has been one of the worst prognosticators of the economy in the
world. And much more important than just
predicting poorly is the fact that they acted on the predictions. For example, Greenspan was 4 years early with
his “irrational exuberance” warning in 1996 (just before the market tripled),
and reversed that position just in time before the 2000 stock market crash led
by the dot coms that were the most over- valued sector in history .
Even worse than
the calls in 1996 and 2000 was the fact that Greenspan lowered rates to 1% in
mid-2003, and kept them there for a year.
This caused the start of a housing bubble and debt accumulation that was
unprecedented. That was when Comstock
was warning our viewers about a housing bubble in every single comment we
wrote. Greenspan again stated during the
period of 2005 to 2008 that you cannot predict a bubble until the bubble bursts. That was just before the sub-prime mortgages
and debt collapsed on the U.S. economy and all developed countries in the world
causing the “great recession”.
amazing is the fact that the Fed has not been correct in virtually all its
major calls from Greenspan, Bernanke, and now Ms. Yellen. (The last time the Fed was correct in its
prognostications was when Volcker raised rates to control inflation in the
1970s and early 1980s.) To top off the
last 3 of the Fed’s poor predictions was team Bernanke’s tightening in 2008.
They followed that up by leaving short rates unchanged between April and
October as the economy was crashing. He
and his team also made hawkish statements that restricted demand and worsened
the decline in the economy.
hasn’t been around long enough to be able to look back at her positions and
actions, but it is clear that her predictions of “an overvaluation of the
biotech industry in July of 2014 has been clearly wrong since that industry
rose about 50% over the past year. We,
at Comstock, believe that the latest moves by Yellen and her team will prove to
be just as bad as Greenspan and Bernanke.
And if she winds up starting another QE, it will produce the same result
as the prior two chairmen. Of course there is one person on her team, James Bullard (President of the St. Louis Fed), stated just this week, "When asset bubbles start, they keep going until they blow up out of control with devastating consequences". This statement could change the history of poor calls by Fed members.
belief at Comstock is that the Fed will not raise rates during the current year
and following year because of a weak deflationary economy. In fact, we believe that the Fed (under
Yellen) will start QE-4 this year, but this
time, instead of a stock market rise, we believe that the investment community
will recognize the trouble the Fed will continue to have in “normalizing” rates. This time, in our opinion, there will be an
exit from stocks and commodities and result in a severe bear market. So once again, we at Comstock remain skeptical
of the Fed Reserve leadership and its ability to steer the U.S. economy away
from the disaster regardless of their clever wording.