Does the Stock Market Like Janet Yellen?

Monday, September 16, 2013, was an interesting day in the markets.  I usually avoid discussing one-day market moves, unless something big happens.  But in this case, the interesting event is why the markets moved.

Lawrence Summers, a former Treasury secretary, withdrew himself as candidate as the next chairman of the Federal Reserve.  This led to a belief that the next chair of the Fed will likely be Janet Yellen, a true inflationist.  The markets responded.  Stocks were up big to open the day and interest rates went down. Bond buyers were optimistic that the Fed would continue to prop up the bond market with more quantitative easing (monetary inflation).

Summers was thought to be less of an inflation "dove".  He is a Keynesian like most of the rest of them in the elitist club, but I suppose Yellen is more outspoken about her desire for massive monetary inflation.  Her and Paul Krugman could get along just fine.

In the grand scheme of things, I am not sure that the next Fed chair matters all that much.  I have already offered 3 reasons on why I think there will not be a long stop of quantitative easing any time soon.  I think as long as price inflation remains relatively low, then the Fed will keep propping things up with more funny money.

While I don't think the next Fed chair matters much in terms of policy, it is still an interesting thing to watch.  Even more interesting is to see how the markets react.  Stocks and bonds really liked the news that Yellen has a good chance at getting the nomination.

What does this tell us about stocks?  It shows that much of the gains in stocks are taking place due to monetary policy.  As long as the market sees more monetary inflation in the future, then investors are willing to buy stocks.  The same goes for bonds, at least in the short term.  But it also means that stocks and bonds could come crashing down when a tightening of monetary policy seems more likely.

Ironically, stocks and bonds gave up much of their gains by the end of the trading day.  This was blamed on talk from Obama about the debt ceiling.  We can't ever really be certain about why stocks and bonds rise and fall, other than the behavior of buyers and sellers.  Maybe the stock market retreated a bit with investors realizing that it doesn't matter that much who the next Fed chair will be.  There was even a little talk at the end of the trading day that maybe Summers isn't out of the running for sure.

In any case, it seems ridiculous that the stock market would shoot up because of the possibility of one particular individual getting appointed as Fed chair.  But that is the reality of the world we live in.  Until more people realize they are being ripped off by the central bankers and the politicians, then it will continue to go on in some manner.  This is why we have to pay attention to politics and central bank policy.  It has a great effect on our money and our investments.  It shouldn't be this way, but that is the reality we have to deal with until things change.