Janet Yellen's debut performance yesterday before the Senate Committee on Banking, Housing, and Urban Affairs may have inadvertently pointed investors toward the best profit opportunities in the continuing financial asset bubble.
The key is a single phrase, one with two meanings that signals where the real money will be made before the bubble goes "pop."
And we know from Yellen's testimony the bubble will keep growing…
Asked repeatedly when she saw quantitative easing (QE) – the monthly purchase of $85 billion in government treasuries and mortgage-backed securities – ending, Yellen stuck to the approved script. As outgoing Chairman Bernanke said many times before her, Yellen said that the Fed will consider winding down the buys "when [it] sees growth that's strong enough for progress to continue." Although the Fed "sees strength in the private sector," the overall recovery is too "fragile" to consider taking away the stimulus.
"The bottom line is that Janet Yellen is even more dovish than Ben Bernanke," says Keith Fitz-Gerald, Money Morning's chief investment strategist. "We're looking at zero level interest rates to continue well into 2014, possibly even into 2016."
"In fact," he says, "given what we now know about [Yellen], I can even envision her increasing stimulus from $85 billion a month to $90 billion or even $100 billion a year or two from now if the economy has a major misfire. Given the lack of recovery, it's not beyond the realm of possibility anymore."
This means that stock markets are likely to continue rising, even as revenue and earnings slow, Fitz-Gerald says.
And Yellen's testimony pointed investors toward the best profit opportunities in the continuing bubble.
Interest Rate Sensitivity for QE Profit
In her testimony, Yellen responded to a question from Sen. Robert Menendez, D-NJ, about wealth disparity, saying that while Federal Reserve policy aims to "benefit all Americans broadly," its policies begin to "ripple out" from "interest rate-sensitive sectors."
At face value – indeed, in the economic theory that seems to drive the Fed – "interest rate-sensitive" indicates a firm that builds and sells products that are bought with debt. The classic example is housing, where most people buy a house by taking out a mortgage loan.
But there's another meaning, says Fitz-Gerald…