Don't ignore Janet Yellen's market warnings

The Federal Reserve chair can spot pockets of risk or overvaluation as soon as they appear.

By The Fiscal Times Jul 21, 2014 11:55AM

Credit: © J. Scott Applewhite/AP Photo
Caption: Federal Reserve Chair Janet YellenBy Suzanne McGee, The Fiscal Times


Janet Yellen is taking a lot of flak for speaking her mind.


Last week, the Federal Reserve released a biannual policy report just as Yellen, the Fed's chair (pictured), began testifying to Congress on the state of the U.S. economic recovery, the outlook for inflation and what’s happening in financial markets these days.


What Yellen had to say on the last of those factors sent many folks into a tizzy.


The Fed views valuations in some parts of the market -- especially for smaller social media companies and biotech stocks -- as being "substantially stretched," even after a "notable downturn in equity prices for such firms early in the year."


In other words, in spite of all of Yellen's reassuring words to the contrary in recent months, there may be some kind of asset bubble taking shape in at least some corners of the financial market.


The last time a Fed chairman stuck his head out like this was way back in December 1996, and it ended badly -- very badly -- for all concerned. Alan Greenspan was the Fed chief at the time, and his questioning about our inability to know when "irrational exuberance" inflated asset values to levels beyond which they could be sustained by fundamentals triggered a prompt and panicky selloff in stocks.


Within months, however, the Dow Jones Industrial Average ($INDU) was setting a string of records and Greenspan was left with egg on his face.

Greenspan wasn't wrong, of course. The kind of "unexpected and prolonged contractions" he envisaged in his 1996 speech did show up -- but not until early 2000, by which time the Dow had climbed 81 percent. Anyone who had listened to his warnings had forfeited a lot of money.


Burned by that experience, Greenspan never again spoke out to warn the public about bubbles taking shape in the economy or financial markets during his tenure at the Fed. Perhaps he simply didn't see the giant credit bubble taking shape, as he himself later asserted. Or perhaps, as his critics argue -- pointing to the fact that he'd been asked to comment on the possibility of a housing price bubble by Congress as early as 2002 -- Greenspan simply figured that it was safer to stay on the side of the cheerleaders until it was clear that the bubble was deflating, having miscalculated the way in which it would end.


Rightly or wrongly, Yellen may have ignored that history by being as outspoken as she has, and she is attracting a lot of criticism for it -- on several fronts.


Who made the Fed chair an expert on social media stocks or small biotech companies? Does Yellen have the know-how to determine what constitutes a fair valuation for a fledgling biotech stock, some observers gripe?


Others go back to Greenspan's "irrational exuberance" comment and point out that the Fed doesn't have a terribly good track record of getting macro calls like that right.


Then there's the argument that Yellen's jawboning doesn't seem to be working. Sure, social media shares got pummeled, but modestly. Twitter (TWTR), which was already off its recent highs, fell less than 4 percent; Facebook (FB), up 23 percent so far this year, recouped its losses to finish higher on the week. Similarly, the iShares Nasdaq Biotechnology Index ETF (IBB), after slumping since the Fed comments came out, gained 3 percent on Friday, leaving it ahead 10.3 percent for 2014 and 29 percent over the last 12 months.


Here's the bottom line: Yellen knows she is walking a very narrow line as she tries to guide monetary policy back toward some kind of "new normal" for the first time since the 2008 financial crisis.


Financial markets, clearly, have been rallying, even as the economy has been stumbling along. That has left the Fed stuck in an uncomfortable and perhaps ultimately perilous position of keeping interest rates low enough to not jeopardize growth, even if doing so risks creating fresh bubbles somewhere in the financial system.


The Bank for International Settlements has argued that "unusually accommodative" policies (translation: easy money) by the Fed and other central banks have been damaging, and that the continuation of this "unconventional" and "extraordinary" state of affairs involves an entirely new set of risks.


Clearly, Yellen's Fed wants to do what it can to keep bubbles from forming while waiting on monetary policy changes -- the adjustment of key interest rates -- that could undercut some of the economic momentum that may be building. But just because we don't need to fear that Yellen will quickly follow up her words with interest rate changes just yet doesn't mean we shouldn't pay attention to what she is saying.


More than any other single individual in the U.S. financial system, Janet Yellen is in a position to see what is taking place in the economy and its financial markets, and to spot pockets of risk or overvaluation as soon as they appear. Sure, she may be early, and she's unlikely to be an expert on specific stocks (why would anyone listen to a Fed chair on what specific stocks to buy, anyway?), but that doesn't devalue her perspective.


Moreover, Yellen has been in Washington long enough and is smart and savvy enough to be aware of the ramifications of using words and phrases that bring back memories of Greenspan. The very fact that she's doing so means that she probably sees good reason for speaking out.


That reason likely boils down to "caveat emptor." Yellen, in her brief time at the Fed thus far, is telling investors to look out for themselves -- and right now, she feels strongly enough about this particular issue to suggest it is something we might want to worry about. She, meanwhile, will keep worrying about the economy first and foremost.


More from The Fiscal Times


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68Comments
Jul 21, 2014 12:39PM
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"A unified absence of skepticism is a dangerous thing..."

Well as all the so-Called Modern Nations are calling for this or that or who to trust on a given issue, they forget they are the same Nations that lied us into Two Failed Wars. They are same Nations that created Too Big to Fail and Too Big to Jail. They are also the ones spying on their own Citizens. Now they want us to believe whatever they say whenever they say it. Yeah Right.

These Governments are Bought and Paid for and care little to nothing about their own Citizens. They are trying to Create their New World Order right under our Noses. These Crooks really believe we are that stupid. It's high time we let them know different.
Jul 21, 2014 12:35PM
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It doesn't matter who says what, it doesn't matter what negative news there is, nothing matters to those in control of the stock market and your money.  These thieves will continue to manipulate the financial markets for their own personal gain.  Wall St is corrupt and our gov and the SEC support the criminal activity.
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Pretty the US economy is bankrupt. The only question left is when before Sept 15,2015 people are going to wake up to this fact and the dollar collapses.

The US has become weak as clearly shown by it's lack of security at it's borders which considering the federal government ATF got caught selling guns to the Mexican Drug Lords should tell you that those high up do not want a secured border.

Why can't our soldiers defend our border like Israeli soldiers defend their border???

Jul 21, 2014 7:31PM
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DON'T IGNORE YOUR FEARLESS LEADER EITHER!!!!!!!!!

 "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Increasing America's debt weakens us domestically and internationally. Leadership means that, 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
   ~ Senator Barack H. Obama, March 2006


"PERIOD"

Jul 21, 2014 12:29PM
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We'll all sink in a Yellen submarine, a Yellen submarine, a Yellen submarine
Jul 21, 2014 4:03PM
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Does the phrase 'irrational exuberance' ring a bell? 


The market has moved higher not due to new demand, a great break through, technological advances, or any normal things.  It has been propelled higher by FIAT MONEY PRINTING. 


Remove that and the stock market bubble pops.   Be careful out there, the socialists in government can pop the balloon anytime.

Jul 21, 2014 12:14PM
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Sorry, but Yellen has no credibility.  Listening to her lecture us about the economy is like listening to Obama lecture us about foreign policy.  Both of them are academics with no real world experience.
Jul 21, 2014 12:20PM
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The Obama administration has too many fish to fry to allow the markets to drop.  Do you think an organization that willfully uses the IRS to attack people they don't like would think twice about asking Bankers; who attack private individuals all around the world when they are told to, to use for the most part free money to keep these markets at agreeable levels?  Do you undrestand now how supposedly free markets can now go straight up for 6 years like they never have before in the history of free markets?  Understand now why noone trusts or believes these levels to be justified any longer?
Jul 21, 2014 12:42PM
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Wall Street apprehensive about buying because of World Tensions???? GIVE ME A BREAK! There is world tensions everyday and all of a sudden we use that as a lame excuse to get people to sell? Wall Street is nothing more than a bunch of insecure people that can't hack the real world.
Jul 21, 2014 1:44PM
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Looks like we end up green again today.  The entire globe sees chaos and American markets continue up and up and up.   
Jul 21, 2014 2:03PM
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It's a "trending bull market" and has been for over 5 years now...


That in itself is a little dangerous, normally we have trouble going that length of time without slipping into a mild recession; And this one hasn't "completely recovered" yet.. 

Jul 21, 2014 7:36PM
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DON'T IGNORE YOUR GOVERNMENTS SPENDING HABITS EITHER!!!!!!!!!

IF YOU ELECT ME PRESIDENT I WILL MAKE A WHOLE LOT OF PROMISES,  JUMP ON AIR FORCE ONE, AND HIT EVERY GOLF COURSE IN THE WESTERN HEMISPHERE - -  PERIOD!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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Wallstreet is most likely corrupt, but the market is still the best place for the middleclass to make money. They just won't make as much as those that live the market day after day.   March of 2009 - a once in a lifetime moment for most to get out of debt if you had some equity left and a willingness to take a chance.
Jul 21, 2014 7:22PM
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So many people say that the MSN money writers don't know what they are talking about.  They are right.  I don't know why they would then turn around and put faith in the Fed to know what they are talking about/doing.  The same type of people in both places. 
Jul 21, 2014 10:26PM
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I want to thank the Fed & Obama for the wonderful rates I'm getting on my CD's & money market accounts.
Jul 21, 2014 7:33PM
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DON'T IGNORE THIS FELLA EITHER!!!!!!!!!!!!!!!!

Do you remember September 29, 1959 ?
 

He also said that “we will bury you”… meaning economically.

 

   Scary......................Do You Remember Sept 29, 1959?

          

DO YOU REMEMBER WHEN HE APPEARED AT THE U.N.............

 

AND BANGED HIS SHOE ON THE PODIUM?

THIS WAS HIS ENTIRE QUOTE:


WE'RE ALMOST THERE

 
 
Jul 21, 2014 9:53PM
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So isn't Yellen's "warning" really a call to eliminate the alumni collusion in business platforms and restore free enterprise? All that has happened since 01/01/2000 is the steady infiltration of alumni in key hiring positions and management. In 2007-08 they colluded to wipe out everyone who wasn't "them". We have had NOTHING but automated routine at phenomenal cost since.
PEOPLE... 90 MILLION competent Americans were forced into destitution by these slime. America cannot and will not recover nor survive if they remain where they are. Come on, Yellen... tell it like it is... dis-incorporate inherited business platforms. Let's get rid of the veil of anonymity and put risk back in management. 
I suspect that we won't finish the year with the markets intact. Multiple wars and other fronts cost a LOT. It's got to come from the dumb alumni complacency, not more fake money printing. Fry cooks shouldn't be running major corporations but they are. End that. Let's recover instead. 
Complacency isn't a business move, it's death.
Jul 21, 2014 10:58PM
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ZERO



Number of bankers in jail for mortgage backed securities. Next up.....REITS

Jul 21, 2014 8:35PM
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Listening to all these analysis experts is so damn comical!  Check out the weather and know when to turn on the sprinklers.  Play golf and grab a burger and a brew!  It makes not a difference to me.  However, the younger generations (clueless) are in a hole that they will never recover from and they do not know it.  Love those "machines"...never have witnessed such obsession from a couple generations.  Soon, they will have no money to buy the necessary "upgrades".  Then what?  Grow a garden! 
Jul 21, 2014 8:16PM
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The big question that OBAMA asked over the weekend was 

IS THIS A PAR 4 ?
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