The 'Easy Money' Band Is Getting Back Together
Janet Yellen is back in our lives... The 'easy money' band is getting back together... A Yellen-Powell combo in Washington would be unprecedented... Expect more of the same... Doubling down on the 'Melt Up' story...
They're looking to get the band back together...
In January 2019, about a year into his tenure as Federal Reserve chair, Jerome Powell sat onstage at the American Economic Association's annual meeting in Atlanta. To Powell's left was his predecessor Janet Yellen... and to Yellen's left was her predecessor, Ben Bernanke.
"It's great to be here, and also, it's great to be with Janet and Ben, as always," Powell said, before turning to his prepared notes at the start of the roundtable interview session.
As always.
That's about all you need to know. They're old pals, these past and current Fed chairs.
Powell was a Fed governor for all four years of Yellen's run in the central bank's top role from 2014 to 2018. And Yellen was Bernanke's vice chair from 2010 to 2014. She has been around this game for three decades, and her record is what it is.
The school of Keynesian economics sticks together, after all. And today, almost two years after that roundtable session, they're looking to get the band back together in an unprecedented way...
Yellen will be Joe Biden's nominee for the next Treasury secretary...
Biden said as much this week... And if you follow the nuances of the Fed – as we do – the news makes for a few very straightforward points that apply to all investors.
Yellen's name should be familiar to longtime Digest readers... It's synonymous with "easy money" policies and the era of unlimited quantitative easing ("QE") ushered in by Bernanke amid the financial crisis of 2008 and 2009.
This means, in a role representing the White House just like Steve Mnuchin does for the time being, we shouldn't expect Yellen to stand in the way of anything wanted by the seven-member Fed, led by Powell... assuming she is officially appointed to the role.
And as we know, Powell wants more stimulus. So does Yellen. So does Mnuchin at the moment. As Stansberry NewsWire editor C. Scott Garliss explained last week...
During [Yellen's] time at the helm of the central bank, she helped steer the economy safely through the aftermath of the financial crisis. She ensured interest rate policy stayed as accommodative as possible. She made sure plenty of money flowed into the financial system.
She's viewed by Wall Street as a dove. That means she's inclined toward easy-money interest rate policy... she believes in economic stimulus.
After all, she's known as a Keynesian economist. That term comes from John Maynard Keynes. He believed government served one main role when it came to economic influence. In times of economic hardship, the government's main role was to stabilize and stimulate growth via monetary (central bank) and fiscal (government) policies.
That's exactly what Yellen did in her prior role. And that's what she'll be expected to do in her new role.
We're already seeing things continue in this direction...
This week, a few Democrats and Republicans have emerged from their dug-in corners and home offices to at least talk to one another again... They've put a nearly $900 billion stimulus proposal on the table.
Perhaps Mnuchin, the current Treasury secretary who has been the White House's negotiator with Congress for the past year, is talking over the details with Speaker of the House Nancy Pelosi as we speak...
It may or may not include more direct payments to everyday Americans... But in any case, Mnuchin says he's in favor of more support for small businesses.
Just today, Mnuchin said President Donald Trump would sign off on a bill proposed by Senate Majority Leader Mitch McConnell that would extend current pandemic-related unemployment benefits another month to the end of January 2021.
Imagine the same discussions with Yellen on the phone instead, and you can see how the flood of fake money is not going to stop beyond that. In fact, we don't even have to imagine it...
As Scott reported this morning in his daily "market headlines" update, just yesterday, Yellen said the economic fallout from the pandemic requires urgent action to avoid a "self-reinforcing" downturn.
As if one easy-money-friendly Fed chair talking out loud wasn't enough, now we might have two pulling the strings and going on TV every other day in Washington to say the same things over and over again...
A Yellen-Powell fiscal and monetary policy ticket would be unprecedented...
When you look at the history of Fed chairs and Treasury secretaries, only one other time in U.S. history has a former Fed chair become Treasury secretary. And that time, it happened under different circumstances...
Former Textron executive G. William Miller served a little more than a year as Fed chair from March 1978 to August 1979 under President Jimmy Carter. And Miller is generally considered to have done little to help during an era of high inflation...
During his short tenure, the U.S. dollar's value massively decreased. In November 1978, just 11 months into Miller's term, the dollar had dropped nearly 34% against the German mark and almost 42% against the Japanese yen.
That prompted the Carter administration to launch a "dollar rescue package"... This package included emergency sales from the U.S. gold stock, borrowing from the International Monetary Fund, and auctioning Treasury securities denominated in foreign currencies.
At one point late in his run as Fed chair in 1979, Miller was outvoted by the other members of the Fed board during a meeting in which he opposed an increase in the "discount rate" – the rate at which the Fed lends to banks.
Then, in August 1979, Carter replaced Miller as Fed chair with Paul Volcker... and simultaneously appointed Miller as Treasury secretary, a role where his economic policies were pretty much the same. Unsurprisingly, inflation stayed high.
It's kind of an apples-to-oranges comparison – since never before has a former Fed chair from one (or more) administration become the new Treasury secretary under another administration – but that may be the lesson for today... that it was more of the same.
We don't get the sense there will be much room for material debate between the Treasury and the Fed...
Yellen's first comments during the same January 2019 roundtable session in Atlanta were to agree with Powell wholeheartedly about his perspective and outlook on the economy. A decade of "expansion" was still continuing, and she expected it to keep going...
I don't think expansions just die of old age. Two things usually end them: One is financial imbalances and the other is the Fed.
Usually when the Fed ends an expansion, it's because inflation has gotten out of control and the Fed needs to tighten to bring it down...
Inflation expectations seem well-anchored... and I don't really see financial imbalances in the economy at this point that look to be threatening.
We'll get to the "I don't really see financial imbalances in the economy at this point" mind-boggler in a moment...
But first, let's just point out that in Yellen's statement, she didn't predict a pandemic ending the record-long expansion and bull market... It once again reminds us that even the "smartest people in the room" can't predict the future.
But keen observers can reasonably predict certain folks' responses to various events...
For the Fed, it's this – today, tomorrow, and seemingly forever... Let's just flood the financial system with dollars while keeping interest rates low.
Even if Congress doesn't agree on another massive stimulus package, the Fed is already prepared to increase purchases of Treasurys and agency mortgage-backed securities. The current pace is $120 billion per month.
Frighteningly, folks are just numb to this stuff at this point – in part, because it can be hard to understand. But it's as significant as anything else that makes front-page news on any given day...
We know what it means. As we wrote back in the July 27 Digest...
Direct deposits and extended unemployment benefits might ease some panic in the short term. But do they really help "we the people" and the health of our country in the long term? The simple answer is "no"...
The U.S. dollar has lost 95% of its value since 1913, when Congress passed the Federal Reserve Act and "modern" central-bank policy began... and since then, the Fed has only increased its interventions over time.
It might sound counterintuitive, but unless someone takes their stimulus check and literally wins a state lottery, this means the "wealth gap" between the rich and poor will keep growing...
Those with fewer dollars to their name get relatively poorer every time a new one is created... and more frustrated whether they know it or not.
And now, let's talk about those "financial imbalances" that Yellen, the former Fed chair and future Treasury secretary, thought didn't exist at the start of 2019. As we said in July...
Even before we all started living in a pandemic economy, the gap between America's richest and poorest families had more than doubled from 1989 to 2016...
Middle-class incomes have grown at a slower rate than those of the rich for the past 50 years...
And the highest-earning 20% of families in the U.S. made more than half of all U.S. income in 2018.
This is just putting numbers to what many Digest readers likely already know.
All someone needs to do is drive around, or take public transportation, and look at what's happening on the streets in cities and towns all over this country.
It's chaotic – no wonder folks are wanting and needing more money in their pockets. Stability feels like it's never happening again, and the "reckoning" will eventually come, as our founder Porter Stansberry has noted in the past.
Now, we may be concerned about the long-term consequences of all these policies. But with all this said, if you're invested in stocks at this moment... these developments will likely help push stock prices higher in general.
In the lingo of True Wealth editor Dr. Steve Sjuggerud and his research team, everything we discussed today is a lot more fuel for his "Melt Up" thesis...
In fact, a Yellen-Powell world might make a few more trillion gallons of fuel for the Melt Up...
When someone at the Fed hits the "create" button on its digital dollars, or when the government lends to itself with interest rates near zero, it ultimately pushes demand for stocks higher from anyone looking to make money...
After all, when Steve started talking widely about the Melt Up, he talked about it going hand-in-hand with the "Bernanke Asset Bubble." And Bernanke was followed by Yellen... who was followed by Powell... who might be working closely with Yellen again soon.
Yellen being back in our lives is almost like a doubling down of the story.
If you've been with us this year, you're likely already prepared for the easy-money environment we've discussed today. For one, our colleague Mike Barrett wrote a great Digest with sound advice recently.
We strongly suggest you give Mike's essay a read right now if you missed it the first time... He goes into great detail about the death of the conventional "60/40" stock-bond portfolio.
Bonds are paying next to nothing in interest today. Negative-yielding debt around the world has never been higher. So it's important to consider investing in hard assets like gold, or even bitcoin, if you want to protect the value of your portfolio.
At the same time, stocks could continue to churn higher from here – the Fed is seeing that – albeit with pullbacks along the way, to the ultimate euphoric market top that marks the end of a Melt Up.
We're not there yet, but it will come eventually. Make sure you're prepared all around.
Why Wall Street Likes Janet Yellen
The potential for former Federal Reserve Chair Janet Yellen to become the next Treasury secretary points toward more government support for the financial system... which Wall Street loves. Our colleague Jessica Stone and Stansberry NewsWire editor C. Scott Garliss discuss the impact of a Yellen-led Treasury in our latest featured video...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 12/1/20): Analog Devices (ADI), Morgan Stanley China A Share Fund (CAF), Cognex (CGNX), Cresco Labs (CRLBF), Crispr Therapeutics (CRSP), Curaleaf (CURLF), Alphabet (GOOGL), Green Thumb Industries (GTBIF), Jushi (JUSHF), KraneShares Bosera MSCI China A Fund (KBA), Match Group (MTCH), Nuveen Municipal Value Fund (NUV), Qualcomm (QCOM), Starbucks (SBUX), Silvergate Capital (SI), ProShares Ultra S&P 500 Fund (SSO), Trulieve Cannabis (TCNNF), ProShares Ultra Semiconductors Fund (USD), Vanguard S&P 500 Fund (VOO), and Zymeworks (ZYME).
In today's mailbag, more feedback on Dan Ferris' pre-Thanksgiving Digest. Do you have a comment or question on this topic or anything else? Send your notes to feedback@stansberryresearch.com.
"Dan, I couldn't agree with you more. This nanny state is completely out of control. I keep waiting for people – hundreds and hundreds of thousands of people – to say 'enough' – this is completely out of control and is primarily about power and has very little to do with health. I wonder if any of these health department bureaucrats, and the politicians that they influence, ever read anything.
"I don't think I will ever view health department bureaucrats in a positive light going forward. Have these people not read the 'Great Barrington Declaration'? That declaration on how to treat COVID in a sensible and compassionate way has now been signed by over 43,000 medical and public health scientists. Lockdowns are not the answer.
"Targeted approaches – depending on individual risk – are the answer. The overall COVID fatality rate is in the neighborhood of 0.2 percent. But there is a thousand fold difference between the mortality rate in older people over 70 and the mortality rate in children. Keeping students out of school is a grave injustice to those children. Lockdowns have serious and deadly effects in America and around the world in a thousand ways.
"For example, the U.N. estimates that 130 MILLION additional people will starve this year as a result of the economic damage from the lockdowns. That is tragic, heartless and needless. We need to implement a targeted, logical approach to combating this disease. Those who are not vulnerable should resume life as normal. Schools and universities should be open for in-person learning. Extracurricular activities should be resumed. Restaurants and other businesses should open and arts, music, sports and other cultural activities should resume.
"Here again government FAILS the people. Just like in not developing true energy independence in the 1970s. Just like in creating the Ponzi-scheme social security system. The list is endless. Government is not the answer." – Paid-up subscriber Dale N.
"Just a follow through on your Thanksgiving advice. My wife is a nurse doing contract tracing at the local health department. Apparently someone took Dan's advice to rage against restrictions by hosting an enormous Thanksgiving gathering, even though the host was exhibiting symptoms of infection.
"Now two pages of contacts from that party need to be in quarantine for two weeks. Who knows how many will get sick. But the liberties were unimpaired thank heaven!" – Paid-up subscriber Douglas V.
All the best,
Corey McLaughlin
Baltimore, Maryland
December 2, 2020