It?s All About Larry
When I first heard about Larry Summers decision to withdraw his name from consideration as the next Chairman of the Federal Reserve, I thought ?Whoa! ?RISK ON, here we come.? I knew immediately that global stock (SPY), bond (TLT), and commodity markets would rocket and the dollar would crash (FXA), except against the Japanese yen (FXY), (YCS). That?s what we got in spades at the Monday morning opening.
This has to be one of the greatest left-handed compliments of all time. Who knew Summers choice to remain in the private sector would add 20 points to the S&P 500 and slash 10 basis points off ten year Treasury yields? The markets are saying ?Thank you for staying away,? in the loudest possible voice. It reminds me of the huge pop in Microsoft (MSFT) stock we saw in the wake of CEO Steve Ballmer?s retirement announcement. Is Summers really that bad?
You have to wonder if the guy who got fired as the president of Harvard University for his cantankerousness was the ideal pick to build a consensus among the sitting Fed governors, a group already known for outsized egos. The financial markets were afraid that he would deep six Ben Bernanke?s quantitative easing policy because it might reignite the inflationary fires far down the road.
After all, it wasn?t his idea, and his public comments about the hyper expansionary monetary policy were neutral at best. ?Not invented here? would have been a great reason to end the stimulus once the new governor takes up his post in January. This is why I have been predicting that a Summers pick by Obama would have chopped 10% off the Dow in a matter of days.
My long time friend, Federal Reserve co-chairperson, Janet Yellen, is now the no brainer winner here. For a start, her co-chair position makes it an easy transition to the top job that will be welcomed by the markets. She is widely loved and respected at the UC Berkeley Haas School of Business, where she taught for many years, and where I also have been known to address the occasional class.
She is already viewed as an ultra dove who will keep QE initiative alive and well. Fed governors tend to be more representative of their local economy than national trends. Texas governors reflect what is happening in the oil industry. As the most populous state in the nation, California governors are a mirror image of what is going on in the housing market, the Golden State?s largest industry. Education and technology are not far behind.
That is great news for the rest of us. A housing priority means keeping interest rates lower for longer. It will not only help the real estate market, but all ?RISK ON? assets as well. It makes our jobs as traders easy. You just close your eyes and BUY. That?s why stocks are inches short of all time highs as I write this.
I have been ramping up risk in my model-trading portfolio all month, as have most other hedge fund managers. But I was doing so for different reasons. I did not believe Bernanke would taper this month, as the economic data are lukewarm, at best. I thought a taper no show would send markets soaring, and was positioned accordingly. It turns out that a Summers no show has the same effect. It?s all a classic example of ?The harder I work, the luckier I get.?
Which begs us to ask the question, ?Is Yellen really that good?? the permabulls shouldn?t get too deep over their heads here. The things that Janet looks at to track the health of business activity are starting to light up. Housing in San Francisco is up a blistering 32% YOY. And Silicon Valley is probably the only part of the country that is seeing real wage inflation. There are rampant bidding wars here for competent computer programmers and engineers. Soaring asset and wage prices are the traditional reason for the Fed to throttle back and raise interest rates. Therefore, the ultra easy monetary policy the markets expect from Yellen may, like Larry Summers, be dead on arrival.
Obama also has an opportunity here to address a frequent complaint from his base, that he hasn?t been appointing enough women in senior positions in his administration. Here is a great one all tied up with a bow and ready to go.
Janet Yellen grew up in the Bay Ridge section of Brooklyn, New York, from which the Italian branch of my OWN family originates. She graduated summa cum laude from Brown University (I thought they didn?t give grades?), and went on to get a PhD from Yale, where she rubbed shoulders with Hillary Clinton.
She started work as an economist at the Federal Reserve in 1977. Her first political appointment came in 1997 when Bill Clinton named her to the Council of Economic Advisors. From 2004-2010 she was president of the Federal Reserve Bank of San Francisco, where she was a voting member of the Federal Open Market Committee. In 2010, Obama made her vice chairperson of the Federal Reserve.
Oh, and for good measure, her husband, George Akerlof, has a Nobel Prize in economics. The kitchen talk must be fascinating.
A woman in charge of the national purse strings? Yikes! There goes my bowling allowance!
