With the Senate having changed its rules to allow confirmation of Presidential appointees to require a simple majority of 51 votes the Yellen era is now fait accompli. Janet Yellen will succeed Ben Bernanke as Chairperson of the Federal Reserve with or without Republican support.
In the attached clip, David Kotok of Cumberland Advisors says Yellen’s basic ideology is as clear as her confirmation itself. “Clearly Yellen is saying ‘I’m not going to shock the world. I’m not going to come in here with a club and turn things upside down.”
As far as stocks are concerned that’s both good and bad. On the one hand it means a gradual, at best, move towards the reduction of QE3, a program under which stocks have thrived at the expense of other asset classes. More distressingly for stocks, sticking to the plan also implies there will in fact be a move towards reducing the "pedal to the metal" stimulus at some point. No one knows what that means and stocks typically don’t deal well with uncertainty.
Kotok’s best guess is that stocks and the economy will take the a slow withdrawal by the Fed in stride. If nothing else a reduction of stimulus will restore economic balance to an economy heavily skewed in favor of the rich and corporations.
“The assumption was that the rise in equity prices is all due to the Fed and QE,” Kotok asserts. “There’s a very big profit share out of the GDP going to American companies. It’s going there at the expense of the labor share, and the labor share and the employment situation in the United States is very weak.”
As Henry Blodget pointed out earlier this week profits are very high:
… and wages as a percentage of GDP are a national embarrassment:
Then again stocks are at an all-time high due not in small part to to those horrific societal imbalances:
If you’re a human being creating more balance in the economy towards more equality is sane, humane, and neccessary. If you’re bullish on equities there’s a very strong chance it’s a bad thing in as much as any change from the current situation would neccessarily be worse.
Will investors bet on new all-time highs in the face of uncertainty? I personally strongly doubt it. Kotok takes the other side. “That’s why they make chocolate and vanilla ice cream,” he says with a fresh take on the bulls vs. bears metapor.
I’d take profits on both flavors.
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- Ben Bernanke