"Kee" Points with Jim Kee, Ph.D.

Stocks finished up last week thanks to a healthy jobs report. There were 223,000 new private sector jobs created in April, a welcome bounce from the disappointing 85,000 March number (originally reported at 126,000). UK election results favoring David Cameron and the Conservative Party there also seemed to help markets on Friday. On the negative side are Greece’s unresolved finances. Greece has interest payments due tomorrow (Tuesday), which it can probably scrape together, but it needs a bailout and is asking for more time. In Asia, China cut rates for the third time in six months in recognition that the slowdown there is (or could become) more severe than officials had hoped.


The other big event that (temporarily) roiled markets last week was Federal Reserve Chairman Janet Yellen’s statement in Washington last Wednesday that “equity market valuations at this point are quite high.” That’s probably the darker side of “macro-prudential” thinking, but it shouldn’t have come as a surprise. Here’s what I wrote in Kee Points back in 2010 regarding this very issue based upon a speech given by Janet Yellen (before she was Chairman) at the annual meeting of the National Association of Business Economists:


“Yellen gave a masterful but somewhat terse discussion of central bank policy, asserting that ‘we almost had a global collapse and came frightfully close to a 2nd Great Depression.’ She asserted that balance sheet rebuilding has led to a slow recovery. Also pointed out that the Fed has an enhanced arsenal of regulatory tools for engaging in what she calls ‘macro-prudential’ policies, a new buzz word I sense. The first focus should be to reduce systemic risk, or risk to the whole system, which she said is caused by leverage and short-term funding, high correlations of risk exposures across institutions, and interconnectedness and complexity of the financial system. I think most of the economists in the room felt that this was important given what we’ve just been through, but were skeptical of the Fed’s ability to do it. I put it in a bucket called difficult things that are definitely worth trying. The second focus that Yellen mentioned was identifying asset bubbles and dealing with them. I don’t think anyone had confidence in that. For example, my table submitted questions (as did others I later found) as to whether or not the bond market or gold was a bubble, how would you know, and what would you do? These questions weren’t addressed. More to the point, Dr. Yellen gave a speech in 2006 arguing that it wasn’t clear whether or not there was a housing bubble(!). I put bubble identifying and popping in a bucket called difficult things that are probably not worth trying, and I talked to a few economists at the conference who felt otherwise. But there was certainly a consensus that the quality of people at the Fed like Janet Yellen is unequalled in Fed history.”


I don’t think Janet Yellen is on a campaign to pop bubbles right now, just stating the obvious. That is, stocks are at the higher side of normal valuation ranges, but not bubble territory consistent with the tech bust of the early 2000s or of the nifty-fifty collapse back in 1973.