Financial media pundits have been breathlessly speculating lately about who the next Fed chair will be.
Yellen again? Will it be Cohn? Warsh? Or… somebody else?
I'm sure it's something that you, like me, have been spending sleepless nights thinking about.
Well… maybe not.
But the media needs a "topic du jour" to get us all to watch the birdie and divert us from the only fact that matters…
That the Federal Reserve is getting ready to knock the markets for a serious loop. The "fix" is in. That outcome is inevitable.
Still, this horse race the media has set up ("Who will win?!") is pretty entertaining. So I'm going to handicap it for you.
More importantly, I'm going to show you what you really need to keep an eye on to make sure your money's safe.
The Fed Has Declared Its Intent to Sink Stocks…
…But if you and everybody else in the public are selling, who will Wall Street sell to?
How will the sharks and shakers of Wall Street get their long positions whittled down to a manageable size?
How will they build up short positions, so that they can profit when the bear finally emerges from his den?
They need to keep the public on the buy side of those trades, for crying out loud!
So they divert your attention.
Does it really matter who will be the next Fed chair? Not in the least.
There are no radicals in the bunch of names that have been floated to replace Yellen except Yellen herself.
The rest of the "horses" in the race are all members of the Washington-Wall Street axis, the establishment echo chamber.
Two are front-runners; the rest are dark horses.
Let's see if we notice anything in common in this not-terribly-crowded field. Or if there are any signs that any of these people will be revolutionaries in the mold of Paul Volcker, the 6'8" giant of central banking.
The Reigning Champion: Janet Yellen
Yellen, who is the shortest Fed chair in history (even shorter than Bernanke), is growing in stature in my eyes. I'll get to that in a minute.
She's got a fantastic resume:
Fed chair, Fed governor. Former San Francisco Fed president, chair of White House Council of Economic Advisers, Economics professor: Harvard, Cal Berkeley, London School of Economics.
And, like I said, she's perhaps the most radical of the bunch (I'll show you why in a minute).
We know who she is, what's she's done, and, most importantly, what she plans to do.
She has set the Fed on "autopilot" to reduce the size of its balance sheet. That will shrink the monetary base and take money out of the banking system.
Still, she's not a lock…
These folks (mostly) shouldn't be counted out:
3-2: Gary Cohn
Trump's chief economic adviser and chair of the National Economic Council. Former president and COO of Goldman Sachs.
The media considered Cohn the front-runner until Cohn couldn't control himself and became a truth-teller. And truth-tellers (at least ones that aren't retired four-star generals) can have short careers in government these days.
Still, Cohn is Goldman Sachs. As we say in Philly, he's a "big mahoff," a seriously important person. Connected, too: He knows more guys than guys who know guys.
Elsewhere in the "starting gate," we have…
Even Money: Kevin Warsh
Warsh is a Harvard-trained lawyer. Like Ben Bernanke, Warsh is currently doing gig work at a think tank. He is a fellow at the Hoover Institution of Stanford University.
Think tanks are welfare programs for former high-level bureaucrats.
Plutocratic elites fund do-nothing jobs for former top-tier bureaucrats at outfits like the Hoover Institution, the Brookings Institution, the Cato Institute, and the American Enterprise Institute.
They do it because former bureaucrats know guys, and they know guys who know guys. That's extremely useful to plutocrats – it's how they stay plutocrats and how they make more plutocrats.
Knowing guys who know guys is the path to wealth and power in the Washington-Wall Street revolving door.
Those who play the game well – essentially, the most sociopathic personalities – are the ones who rise to the top. They say that the cream rises to the top. In Washington and on Wall Street, the cunning rise to the top. It is not because they are exceptionally brilliant and have good ideas. It is because they are skilled political players, good at manipulating others.
If I were handicapping this horse race, I would give Warsh 3-2 odds.
He is well connected to the "palace guard." His father-in-law is Ronald Lauder, of the Estee Lauder fortune.
Unlike the suddenly forthright Cohn, Warsh has kept his mouth shut.
Now, here are the banksters bringing up the rear – the dark horses in this race…
10-1 Longshot: Jerome Powell
Turns out, Powell is a Fed governor. He is such a faceless bureaucrat that, even though I spend all my waking time obsessively tracking the Fed's every move and voraciously consuming every iota of data they publish, I have barely heard of him.
Powell is a former Carlyle Group partner and a former assistant secretary of the Treasury (there are usually 12 assistant secretaries of the Treasury, to give you an idea).
Like me, you might not have heard of Powell, but you probably have heard of Carlyle. It is reportedly the largest private equity firm in the world. It controls a reported $193 billion in assets.
It is deeply connected to the D.C. power establishment – particularly the GOP.
In short, Powell has power, and – you guessed it – he knows guys who know guys.
So, he's not the longest longshot.
50-1 Really Longshot: John Taylor
Most investors may have heard the name but he's purely an academic.
He's never had a real job, although he was briefly a Treasury undersecretary (not to be confused with assistant secretary of the Treasury, mind you) under George W. Bush. Early in his career, he worked in a variety of government economic posts.
My guess would be that he has little chance.
Trump is a guy who likes guys who know guys. Taylor is just a Stanford economics professor. I mean, he knows guys, but they're mostly other academics and media talking heads. Trump already knows them.
However… Taylor is also a beneficiary of the Hoover Institution influence-buying fund. The power structure sees him as a Possible Somebody.
Thing Is, It Doesn't Matter in the End
This Fed chair-picking exercise is all academic, you see, because Yellen has set in motion a momentous policy.
It's the kind of policy that, when its effects are finally felt in year or two, the establishment economists will all say, "but nobody could have foreseen this."
In fact, a few people have warned about it.
Yellen is a true revolutionary in my book. She moves slyly, and shyly. She plays the bumbling academic role to the hilt.
But she's a cold-blooded enforcer who is moving the Fed back to "old-time orthodoxy." And in a world and market suffering under the yoke of an absolutely insane monetary policy, orthodoxy is radical.
And lucky thing, too…
"Mr. Easy Money" Wiped Out a Lot of People
Ben Bernanke left a giant, stinking, $4.5-trillion-dollar mess in Yellen's lap when he left the Fed.
His diabolical plan was to make sure that the banking system would always be so awash in cash that interest rates could never rise materially.
Bernanke was, and will for all time be, "Mr. Easy Money."
No Fed chair in history even comes close. Bernanke knew that, for all practical purposes, it would be impossible to return to tight money without crashing the markets.
He was right about that. The markets will prove him right over the next two-and-a-half to three years.
Bernanke made the choice that speculators and bankers would be the winners, and hardworking, honest, and thrifty savers would be the losers.
My mom and dad, and maybe yours, too, worked hard all their lives, saved a few hundred thousand dollars, and hoped that the income from that nest egg would supplement their Social Security to tide them over for the rest of their lives.
Bernanke robbed them of that with the zero-interest-rate policy (ZIRP), and he robbed the American economy of the spending – and real benefits – that would have come out of that income.
Instead, he gave people a choice: Speculate… or die.
Many who could not, or would not, speculate, did die – at least financially.
Many baby boomers have borne the financial burden of caring for their elderly parents when their parents' savings ran out. I was one of those people. I know other people who were in the same boat, and it's even money you know those folks, too.
Bernanke cynically chose these people to be the losers.
Here's What Could (and Should) Happen, No Matter What
Again, Yellen is the true revolutionary here. Bernanke knew that removing the $2.7 trillion in excess bank reserves that quantitative easing created could not be done.
At least, it could not be done without causing bear markets in stocks and bonds, which in turn would set off another round of financial crises and economic chaos, which would hurt the horses he backed – the Wall Street banks and speculators.
But Yellen, to her eternal credit, has chosen to go ahead and take those excess reserves out of the system, putting the Fed on a path toward "normalization," as the Fed calls it.
I like to think of it as a return to sanity, where thrift and rational investment receive fair and just returns.
The days of wild, riskless speculation with endless flows of free money that cause massive asset inflation will end. We could then return the American economy to a sound footing, based on rational risk/reward calculations, with fair, low-risk returns to retirees and savers.
Maybe Yellen does not realize the pain that this will entail in moving toward that goal. Or, if she does realize, she has chosen to take the risk.
Either way, I think that it's a risk worth taking.
The Street is worried about it, of course, and its spokesmen are trying to divert your attention with media circuses to keep you buying the entire time it's selling.
Yellen has clearly enunciated that the reduction of money in the system under "normalization" will be on autopilot.
That means it won't change unless there's a "material adverse event."
Obviously, that material adverse event, which at the very least would need to be a "classic" yikes-stocks-have-dropped-20% bear market, is still over the horizon.
We could return the American economy to a sound footing.
New Fed chairs have always respected the precedent set by their predecessors until it becomes untenable to do so.
Whomever Trump appoints as the next boss will follow the policy of the old boss. Yellen laid down the law:
There shalt be no material easing of policy until there is a material adverse event.
And believe me, the Fed will tighten the screws until that material adverse event happens.
Bond prices will fall, yields will rise. Stock prices will fall. Interest rates will rise. And they will continue to do that until – you guessed it – we get a material adverse event!
Rule No. 1 is eternal and unyielding: Don't fight the Fed! The bear is coming. He's just over this hill that the market is now climbing.
No matter who Trump picks to move into the Marriner S. Eccles Building, move your assets to safekeeping, systematically and steadily over the next six months.
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About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.