Many commentators witnessed the first Q&A session with Janet Yellen as a disaster.
We don’t see it that way at all.
Yellen is widely believed to be a super dove at the Fed. This is largely due to her being a firm advocate for QE in the past few years.
However, Yellen is at least intelligent enough to know when the markets are out of control (something neither Bernanke nor Greenspan could do). To whit, Yellen publicly stated that housing was in a bubble in 2005. At the time she suggested deflating it (but was concerned about the deflation being too intense).
So, regardless of her various flaws as a forecaster and economist, Yellen has shown herself capable of:
1) Identify bubbles.
2) Calling for action for rein them in.
With that in mind, Yellen’s decision to continue tapering QE indicates that she is aware of the fact the markets are getting out of control again or are approaching a bubble.
This is further confirmed this by her decision to drop the 6.5% unemployment threshold as well as her suggestion that interest rate hikes could come as soon as six months after QE ends this coming December.
In simple terms, Yellen is alerting Wall Street that she will not be the second coming of Bernanke (at least for now) and that she is going to be removing the punchbowl.
The markets typically take a while to register this. The fact that last week was a quadruple witching options expiration helped hold things together. But now that options expiration is over, we’re running out of reasons for the markets to hold up.
Moreover, we’ve recently seen a number of high profile investors (Icahn, Grantham) warn that the markets are overvalued and primed for a sharp drop.
Thus we find the following:
1) Yellen is moving to rein in the markets.
2) Investment legends are warning of a potential drop in asset prices.
3) Corporate profits falling.
This environment is ripe for a market pullback. Smart investors should take this opportunity to prepare for it.
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