BIS vs Janet Yellen

BarroMetrics Views: BIS vs Janet Yellen

The recent war of words between the BIS and Janet Yellen is instructive for two reasons:

  • It clearly sets out the two divergent views on the impact of QE and the consequences of this policy. In this regard, I am firmly in the camp of the BIS. It’s worth noting that the main stream press e.g. FT is in Yellen’s camp.
  1. For the two opposing views see: You will have to subscribe (free). Well worth subscribing.
  2. Yellen’s retort:,
  3. FT’s view:
  • It’s further evidence that we’re likely to see some climatic price action in the markets around Nov 2014 to Mar 2015.

What further evidence you may ask?

I think the most important was the S&P’s response to the Non-Farm payrolls. Putting aside the question on whether the number is robust, if I believed that US stocks are being driven by QE, then we’d expect a strong Non-Farm Payrolls to cause a drop, right? Instead we saw a rally to new highs.

What this tells me is the US stock market is now entering a ‘euphoria bubble stage’ driven by the belief that the FED will not raise rates in the foreseeable future, no matter what. Certainly Yellen’s reply to the BIS shores up that belief.

That being the case, we’d need a Black Swan to shake the belief. I can see at least three possibilities on the horizon:

  1. The consequences of FACTA. Will this lead to the abandonment of the US$ as the world’s reserve currency? Of the three, this has the longest time horizon.
  2. China’s property is coming to an end. Since property prices account for 13% of GDP, every time prop prices drop 50%, we’ll see about a 2% drop from GDP. This means, at best, unlike the 2007-2008 crisis, China will not be able to assist the West. And, if the property bust is worse than expected, it may precipitate the West’s own bust.
  3. The call yesterday by Fabrice Bregier, chief executive of Airbus, for the ECB to intervene to push down the EURUSD, may be sign that the currency wars may be starting in earnest. This could be a catalyst for a higher wages etc…..which would then place pressure on the FED to raise rates.

Let’s see what the next few months bring

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