Originally sent to VIXCONTANGO subscribers on November 24th, 2020
Yesterday, the Wall Street Journal reported that Janet Yellen is going to be Biden’s pick for Treasury Secretary. That shouldn’t be a surprise since we identified her a month ago before the election when we discussed Biden’s incoming economic cabinet.
The reaction by libertarian traders on Twitter was predictable. They think she is a “dove”, that she is Wall Street pet and will be a backstop for markets like she was during the Obama years. But that is not exactly how I remember it. In 4 years from 2014 to 2018, Yellen hike rates 5 times. She has done more rate hikes than Bernanke did in 8 years (4) and Powell did (also 4). Only Greenspan has done more rate hikes than her from the last 4 chairmen. So she is not exactly a “dove”. Yellen actually wanted to start rate hikes in 2015 but was derailed by the Oil Crisis which knocked down inflation for a couple of years. It is hard to do rate hikes when the oil sector which is a significant job creator is in trouble. I thought Yellen was very competent and I have no issues with her track record as a Fed chair. I trust her judgement. She was known as the best forecaster on the Fed team and I think she did a stellar job as Chairwoman. Also I thought Trump should have let her stay on for another term, but clearly Trump wanted a loyalist in the job who will make the institution his crony. He put Powell in there to wreck the Fed and Powell certainly did that in very short order.
When you listen to trader opinions on Twitter keep in mind that many of them are libertarian which means that they are against any government intervention in the economy. Regardless of who it is, they won’t like the appointment. They won’t like Powell, they won’t like Yellen, and they won’t like Warren. They won’t like anybody in government. They think the Fed and the Treasury shouldn’t exist. They don’t think the IRS should exist. Financial Twitter is full of people with extreme right-wing views. They are against government, all the time. As if a libertarian mafia state where you pay exorbitant extortion fees to every warlord around like in some countries in Africa is a better way to run a country. Most importantly, keep in mind that you will never meet a person in real life who espouses these opinions. It’s almost comical how extremist financial Twitter is relative to the general population.
The more important part about Yellen as a Treasury Secretary is that it is a groundbreaking appointment. It really is an earthquake. It’s not that she is the first woman to be Treasury Secretary. She is that, but what I am talking about is something else. The Treasury Secretary position is the 2nd most important position in the cabinet after the President and certainly the most important position with regards to the economy. Traditionally, the Treasury Secretary is a spot given to man of incredible business accomplishments, a titan of industry. In that spot you have seen a Goldman Sachs CEOs , high ranking private equity partners or multinational corporation CEOs. We are talking the Boss of Bosses. Let’s look at the backgrounds of the prior Treasury Secretaries. Mnuchin – private equity partner and youngest Goldman Sachs partner ever. Jack Lew – private equity partner and COO of Citibank. Geitner – private equity partner and head of the New York Fed. Hank Pauluson – CEO of Goldman Sachs. John Snow – Cerberus private equity partner and corporate CEO. Paul O’Neal – Alcoa CEO. Robert Rubin – Goldman Sachs partner and Citibank director. You have had big men at Treasury from Alexander Hamilton who combined the debt of the states to Salmon Chase who consolidated banking reserves to finance the Civil War to Andrew Mellon who was head of the Alcoa industrial cartel and one of the biggest robber barons of his era. Andrew Mellon was Treasury Secretary for 3 Republican Presidents – Herbert Hoover, Calving Coolidge and Warren Harding. It was said that 3 Presidents served under Mellon.
The Treasury which oversees the IRS has always been managed by a titan of the business community, by somebody who is Wall Street blue blood from top to bottom. Actually, a few generations of Wall Street. You don’t get some random government apparatchik to run the Treasury. That’s why I thought names like Sarah Bloom Raskin for the spot were preposterous. She is simply unqualified. Janet Yellen is probably the only human being that is not a titan of industry to make it through Senate confirmation for that position. And therein lies the big misunderstanding that I see on FinTwit.
When Yellen becomes Treasury Secretary, she will be the first “layman” in that position. Notice, I am calling a “layman” a former Federal Reserve chairman and titan of academia and government. Yellen, after all, has created entire schools of economics and is one of the top economists of her lifetime. What I mean is the first regular person who is not a titan of industry.
What that means is that the entire tax code for corporations and individuals will be for the first time run by somebody who doesn’t preach the gospel of the Chamber of Commerce. Congress leaves many judgements to Treasury and Yellen’s judgement will be radically different than Mnuchin who was the most pro-business extremist in that position ever. Even Hank Paulson wouldn’t dare to make some of the rulings that Mnuchin made. A lot of them are probably illegal if we had the time to prosecute stuff like this during the Trump years. It is not me that says it – it is Republican senators who called Mnuchin’s rulings on GILTI and BEAT a “violation of the spirit of the 2017 tax law”. Mnuchin was and is an extremist.
Do you remember how upset Wall Street was with Jack Lew and his inversion rulings? Jack Lew is the only other Treasury Secretary that wasn’t really a titan of industry. Janet Yellen is way more pro-labor than Lew will ever be. For me personally, for the first time ever I will be able to trust Treasury’s rulings and IRS judgements. I think the SPX earnings we will get under Yellen will be the first “REAL” corporate earnings recorded in years. The earnings during the Trump era were heavily distorted. Also the IRS didn’t make an effort to collect any taxes under Mnuchin. Under Yellen, we will have a Treasury that collects taxes and doesn’t always rule in favor of business. Larry Summers estimates that US treasury can collect $1 trillion more in taxes if it just bothered to collect them. And more importantly, it will be very difficult for Wall Street and the business community to be overtly attacking Janet Yellen. Wall Street felt at easy attacking Jack Lew. That’s not going to work with Yellen. Not only is she a former Fed chair, she is highly respected and has enormous political capital. Taking on Yellen will be a suicide mission for Wall Street executives. And that is why I think her stint at Treasury will be groundbreaking and ultimately very good for the country.
However, that doesn’t mean that Yellen is good for stocks. I think it is the opposite. It will be good for stocks once stocks are cheap enough and earnings numbers have been adjusted lower and are trustworthy. Don’t forget that Yellen will now be a direct regulator of Virtu, Citadel and other market makers and dealer as well as all the Big Banks. There were a lot of market shenanigans that took place in the Trump years that will be rolled back and investigated. The overnight stock bid will end. Some people that abused their market making powers under Trump will be kicked out of the industry. The practice of scheduling company earnings in a certain order to prop up the stock market during earnings season (putting the best earners first) will be discontinued. I think SPX analysts will be forced to provide more realistic estimates of future company earnings instead of these fictional numbers they post today. There is a lot of false advertisement in the financial industry and I think all of that lying will be dialed back by Yellen. She has direct control over all of that activity. The Treasury can suspend companies and take them out of business. While I don’t think Yellen will be a hunter like Elizabeth Warren, I think we will see a Treasury that for the first time makes sense to the ordinary American. Rich people will get audited instead of poor people. We will not see this distorted libertarian/crony capitalist lunacy that we saw under Mnuchin. Frankly, I consider the market abuses under Trump and Mnuchin criminal and I think they should see jail time for their abuses of power in the markets. It is one thing for a government to peg an asset for 3 to 6 months like any country is allowed to do. It’s another to be pegging markets at all-time highs for 3 straight years through recessions and all kinds of economic chaos to bribe Americans for reelection purposes. That is a crime.
This is not about me and my trading. This is about my daughter and the other 30 year olds entering the investing world today. They have to start saving for their kids today. What are they given? 40 PE multiples, 30 price-to-sales ratio and all kinds of other fraud. Who can rationally invest in such an environment? Based on what? On implicit promises by the Fed to peg prices? When was the last time price controls worked? When the Fed issues an official proclamation that SPX price doesn’t go below a certain level, that’s when I buy it. I don’t believe implicit promises. The Fed will not buy “my” stocks. They will buy the bank inventory, not my inventory. If I have to make a decision as an independent person, I can’t invest in these prices. The non-sense in markets needs to end. The boomers aren’t the last generation on Earth. The stock market needs to function for the younger generations as well. They need to build savings as well.
From an investment perspective, I think the Trump/Mnuchin peg on stocks will be gone. I think initially we will see market volatility until asset prices get adjusted to more normal levels. If Yellen implements some facilities with the Fed, it will be about helping state and local governments, not corporate bonds and corporate boards. Yellen is not going to be bailing out corporate bonds or stocks unless the situation gets really dire. Workers first. We are very far from dire situation for stocks. SPX is up 15% this year on ridiculous multiple expansion. I would stay away from junk bonds (HYG), stocks (SPX). Yellen is bullish for Treasuries and duration as Yellen likes low rates given that she is a labor economist. I think she will push the Fed to do Yield Curve Control. We will see her force banks to lower rates on mortgages, car loans and credit cards. There is a lot that can happen there to compress consumer credit spreads, but I am not sure how you can invest in that. That’s the most bullish investment theme I can think of for Yellen – lowering credit spreads. In the long run, I don’t think Yellen is bullish for Gold, but Gold still needs to hit $3000 given the size of the Fed balance sheet. Ultimately, I think the best performing asset during the Yellen years will be crypto. It will become mainstream and it’s a very small asset class poised to grow by leaps and bounds. Once stocks correct, they will be investable too as I think the economy will get back to good shape after 2022. But the next 2 years should be difficult since we will be dealing with the virus and with big earnings and economic downgrades.
Once Yellen becomes Treasury Secretary, America will become a different country. A more respected country. Let’s hope she fulfills the promise.