I couldn’t resist thinking back to Fed Chair Alan Greenspan while observing Federal Reserve Chairman Janet Yellen during her two-day testimony to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services.

Greenspan would deliver on the first day of his testimony a particular economic and market slant. On the second day, he would offset the tone he used on the first day of his testimony, which was a full two-day performance.

Yellen demonstrated in an unequivocal way that also at the Fed, times have changed. She “condensed” the Greenspan-like two-day even-handed approach into just one session.

Time will tell which communication approach of the two is best for communicating with politicians and the public in general.

It is really interesting to see how the Fed chair in her testimony first says: “If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.”

And then, while continuing, she says in precisely in the next three phrases: “Before then, the Committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings. Instead the modification should be understood as reflecting the Committee's judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting.”
 
Please don’t take me wrong as I don’t want to criticize the Fed chair as she has an extremely difficult task.

But — and this is strictly personal — I’m afraid her wording in her testimony appears to me to be another example of “argumentum ad absurdum” (Latin: argument to absurdity), which is a form of argument which seeks (a) to demonstrate that a statement is true by showing that a false, untenable, or absurd result follows from its denial, or (b) in turn demonstrates that a statement is false by showing that a false, untenable, or absurd result follows from its acceptance.

It looks to me that’s not an optimal form of transparent, understandable and non-confusing communication.

I’m afraid the Fed has boxed itself into a corner.

I would certainly stay away from saying: “The Fed’s path to tightening is so far so good,” because it isn’t.

When you are in the markets on a daily basis, you get that unpleasant feeling (at least I do) that “something is brewing.”

In this context and certainly as a long-term investor, I’d pay attention to what St. Louis Fed President James Bullard said in an interview with Reuters under the title “Fed’s Bullard warns over sharp ‘wake up’ call in markets.”

He said: “There is a disconnect between markets and the Fed and that is going to be reconciled at some point. And I am a little bit concerned that one day markets will “wake up” and “reprice everything.”

In simple words: “Something has to give, that’s for sure, but we don’t know how big it will be and when it will occur.”

I’d like to add here and in the context of portfolio management of a long-term investor who has the intention to sell some of his/her investments in order to cash in some profits, I think it may be a good time to check in a serious way if the “exits” you will be obliged to take (generally spoken, forget choosing your exit!) when abrupt repricing, caused by the markets and not by the central banks, takes place (expect it could and probably will occur abruptly!) will have sufficient capacity to execute your sell order(s).

It’s as simple as that. In case you’d run into trouble selling, it could turn out as a devastating blow to the value of your investments in case markets get into a panic mode, which is a classical pattern in these kind of events.

I don’t expect this time will be different.

Never forget, when panic mode is dominating markets (it doesn’t matter which market), the well-informed, long-term investor has the means to be a buyer and not a seller.

About the Author: Hans Parisis

Hans Parisis is a regular contributor to the Financial Intelligence Report. To join the Financial Intelligence Report, click here. Click Here to read more of his articles.