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A Cost of Honesty . . . or a Rookie Error ?


Poor Janet Yellen!  Americans lost billions of dollars yesterday, when she held her first press conference as Chair of the Federal Reserve System.  But, she really did great!  She explained that the unemployment rate alone will no longer be binding on the Fed’s decisions, which is smart.  She explained the reasoning for the next $10 billion cut in quantitative easing (QE), which was expected.  She explained why the Fed would not start raising interest rates until a “considerable period” after the end of quantitative easing.  She was doing great!

Then, a reporter asked her how long is a “considerable period?”  The correct answer would have been vague like . . . it depends and could vary anywhere from three minutes to three years, depending on the economic circumstances at the time.  Instead, she said “six months,” and the stock market promptly dropped over a hundred points.  Traders quickly did the math, i.e., dropping $10 billion every six weeks from QE means it will be over by year-end and interest rates will therefore start increasing next June.  Interest sensitive stocks, like utilities and REITs, immediately sank – taking the market down with it.  (Short-term interest rates increased about 10 basis points immediately, which is a big move.)

Paraphrasing English philosopher Samuel Johnson, “nothing focuses the mind like your hanging in the morning.”  We all know we are going to die but, fortunately, we don’t know when.  Traders thought they heard that their death sentence would be carried out next June.

Of course, this is ridiculous!  The stock market is rational in the long run but not in the short run.  Yesterday, it was irrational.  Chair Yellen did great.  The stock market embarrassed itself.


A relatively new technique being used on Wall Street is called “word algorithms.”  In other words, if the word “considerable” is used in the same sentence with a number, then interest sensitive stocks would automatically and instantly be sold by the computer.  It is not known how prevalent word algorithms are, but I cannot believe this is any more healthy for the stock market in the long run than high frequency trading is.  They both trouble me greatly.


Finally, one note on a personal level:  I suspect Janet Yellen is one of those rare individuals who thinks, speaks, and writes the same, i.e., in complete sentences, with careful clauses, and no exclamation points.  She even separates thoughts into separate paragraphs.  She is very gifted!

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