SF Fed President Yellen Talks Dovish

Posted by urbandigs

Thu Sep 4th, 2008 02:55 PM

A: I'm taking some time off from real estate this month and watching all that is happening in the stock market & credit world. A little disclosure, I did re-activate my trading account to get a more real time look at what is going on daily in the equity markets; screenshot at bottom of this post of my trading software and what I see (mapping keys right now so positions are minimal for testing). Some breaking statements from SF Fed President Janet Yellen, to me, hints at the reality that a RATE CUT is more likely than a hike as the next move. UD readers know that I have been in the dovish side for a while now, after acknowledging that wage inflation and an expansion in the money supply is not the type of inflation that is threatening us this time around. Rather, its credit/housing deflation that pose that biggest threats to our economy.

For much of 2007 I was focused on how commodity price inflation was not being measured properly and that our fed would be stuck in between a rock and a hard place with rates, due to soaring commodity prices and a weakening economy. I thought a rate hike campaign was inevitable at some point, but just unsure of its start date. But towards the end of the year and into early 2008, I got way more serious about the effects of deflation on our economy and got more dovish; specifically, credit & housing deflation occurring at the same time as soaring commodity inflation. For the past few months, I have been purely dovish in regards to future fed policy, expecting a rate cut and not a hike, likely in response to a market event.

Let me go into what Yellen just stated first, and explain how this fits perfectly into the school of thought that I have been in for most of 2008.

"Q3 GDP WILL NOT HOLD UP"

"FED POLICY MUST BE CALIBRATED TO PUSH THROUGH THE SUBSTANTIAL HEADLINES OUR ECONOMY IS FACING"

"FALLING COMMODITY PRICES HELPING THE FED"

"CREDIT CRUNCH IS DEEPENING"

"NO EVIDENCE OF WAGE PRICE SPIRAL"

Does this sound like a hawkish fed to you if this mindset is shared among other fed members, specifically, voting fed members? Yellen is an alternate voting member of the fed. Her comments perfectly fit into the thought process that ultra high commodity prices and a very weak dollar is NOT the environment hoped for to proceed with stimulative monetary or fiscal policy. And I think monetary policy will have to be stimulative as we face the economic after-effects of this year long credit hurricane and 3 year housing slowdown.

Almost a month ago, I wrote 'A Thought on the Dollar' and stated very clearly where I stand:

"By giving the dollar a boost without actually hiking rates in US or cutting rates in Eurozone, it will give our fed MORE FREEDOM TO CUT RATES should our economy continue to deteriorate down the road.

Ben wants to inflate, and in my opinion will not hike rates as long as there is housing/credit deflation, unemployment is rising, and the financial sector remains under distress. Hiking rates now will be counter-productive to fixing the financials/credit markets (which is so crucial for a housing recovery to take place) and an orderly unwind of toxic securities.

An outcome supported by this way of thinking, is if our fed does indeed cut rates as their next move (who knows when), and if Trichet holds rates at 4.25% for the foreseeable future. Should this happen, then the fed orchestrated it wonderfully..."
I stated my dovish stance on AUG 5th, when almost everyone else out there was still betting on a rate hike as the next move.
"In meantime, I think the fed is talking tough about inflation and may have to cut rates before raising them should the credit markets / housing markets continue to deteriorate OR if an event occurs to stabilize markets before trading re-opens; so I'm more on the dovish side while I see Barry Ritholtz on the hawkish side."
Lets see how this plays out. My money is on an inter-meeting rate cut in co-ordination with intervention to an 'event', to alleviate the shock to the tradable markets before opening. I just dont see the cut coming at a planned meeting. What I would consider an 'event' would be similar to the rescue of Bear Stearns. The most likely events we face are to rescue the GSEs, failure of another top IB such as Lehman or Merrill, failure of a top bank such as WaMu or Wachovia, and such.

We know some big names will fail and the world as we know it is in the process of changing. Lets get it on already!!

Trading Software: I was an equities trader at Tradescape from 1998-2004, after following the tradable markets from the ripe old age of 13; a $250 failed investment in SGI got me hooked. The company was bought by E-Trade, taken private, and now operating as LightSpeed Trading. I find the software fine for the active trader and ticket prices are about $6 per 1,000 shares (or ticket as I call it). I'll vouch for the software for any traders out there who are unhappy with their current trading systems.

lspeed.jpg

Add a comment

5 comments

CAPTCHA Image