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9 years ago

Hi Chris and please call me Bob. I appreciate your reply even though it runs counter to my opinion. Yes Janet Yellen during the conference with LegGarde (I watched it) did say exactly what you said. At current we pay roughly 250 billion per year in interest payments. If we were to normalize rates out dept service payment would be roughly 750 billion to 1 trillion per year. This cannot happen without organic growth in the economy to provide higher tax receipts. I will ay it bluntly I believe that Jane Yellen is talking up the economy and the minute she get sufficient data (data dependent their buzz phrase) she will only back off of a rate increase in 2015 she may in fact send out her Fed Governors to float QE 4. Why? When did the Fed end QE 3? October 2014. When did the economic data begin to fall apart? October 2014. My point here is that even with current rates and Fed policy the economy just can't gain traction. Not with all of this debt. There will be QE4 in advance of the presidential election because Janet wants her job. I have little doubt that she want to normalize rates but Bernanke should have done that months ago but I pulled the parachute cord first. He knew what was coming. To your second paragraph we are on the same page.... Thank you for the reply sir and quality commentary such as your is always welcome even though it may partially or in total run counter to my own. Regards, Bob

9 years ago

Mr. Desmond, you expressed the belief that the Fed will stay on hold as regards raising rates. I would say that Janet Yellen's statement regarding the markets on May 6 belie that belief. She stated that "equity valuations in general are quite high". 10 months ago, when the market was only 7% lower she said that, excepting some social media and biotech stocks, the stock market was not at all overvalued. A 7% move in 10 months does not justify her change in stance. In fact, her stance has nothing to do with the actual valuation of the market. It has everything to do with providing the context for monetary policy. She is telling you loud and clear that the Fed will begin the process of policy normalization this fall unless the economy absolutely tanks, in part to address asset market excesses. It also has to do with staggering policy normalization among the central banks. It was Vice Chair Stanley Fischer who said that "this is the year that we need to act". I believe that he is the one who has Janet Yellen's ear. The market is indeed overvalued. The median PE of the NYSE is at it's highest since WWII. the current PE of 20.8 on the SPX is more than 9x the underlying growth rate of the economy. That is historic. The PE of the market has expanded by over 40% in the last 3 years while the economy has grown less than 8%. That is also historic. A prime example of a high profile pumped up stock and, therefore, a poster child for this market is SBUX. A great company and a great CEO, but an overpriced stock. SBUX trades at twice its growth rate, buy hasn't beaten earnings at all in the past 6 quarters, and hardly at all in the last 4 years. Its EPS actually DECLINED from $1.63 in Q3 2011 to Q2 2012 period to $1.44 in the latest 4 quarter period. This despite the fact that their net income increased from $1.225 billion in 2011 to $2.055 billion in 2014. This was a result of a 65% increase in share count in 2013. You would never know ANY of this listening to madman Jim Cramer who is himself a poster child for this pumped up market. That tyrannical lass known as TINA, you know that financial dome who compels you to buy stocks, may be exiting the stage this September. I am looking for another heavy hint at the June press conference that the Fed will begin to normalize policy without requiring utopian economic data. I look to go long calls on the VIX and long puts in the GLD into that meeting. I'd be interested to hear what you think.