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Janet Yellen Could Be Right, If...

Mike Lipper, CFA profile picture
Mike Lipper, CFA


Janet Yellen, Chair of the US Federal Reserve Board of Governors, has said she does not expect a 2007-2009 financial crisis in her lifetime. For many reasons we hope that she has a long life. One of the lessons learned from lots of sports, including horse racing, and applied to business, portfolio management and life in general is to be conscious of what could go wrong. If you will "the known unknowns" as well as making some allowance for "the unknown unknowns."

As an investment fiduciary, I feel it is essential that one develops an appreciation for the odds that Ms. Yellen may be right.

What Causes Crises?

Major financial crises typically have both preliminary causes and a galvanizing event. The preliminary causes are relatively easy to spot, often by looking in a mirror. The event is often the unintended consequence to an action that forces many to brutally re-examine an intellectual or emotional structure in which we had total faith that suddenly is found wanting.

Underlying Causes

The first cause is the belief in the inevitability of a pre-determined future. The growing enthusiasm for this belief overrides all past cautions. Because we all believe that we should be richer than we are, we will borrow to multiply our stake in the inevitable "goody." Often people and institutions look to borrow from any available source including surreptitiously from others without their notice... embezzlement. Thus, the essential second underlying cause for crises is leverage. (For my mathematical readers- Enthusiasm in the "inevitable" times expanding the use of "cheap" leverage = precursor of crisis.)

Where Are We Today?

Chair Yellen cannot identify any major causes for concerns. She is right at the moment. Focusing on my continuing analysis of the global mutual fund business, I see some potential worries.

Are Equities

This article was written by

Mike Lipper, CFA profile picture
A. Michael Lipper is a CFA charterholder and the president of Lipper Advisory Services, Inc., a firm providing money management services for wealthy families, retirement plans and charitable organizations. A former president of the New York Society of Security Analysts, Mike Lipper created the Lipper Growth Fund Index, the first of today’s global array of Lipper Indexes, Averages and performance analyses for mutual funds. After selling his company to Reuters in 1998, Mike has focused his energies on managing the investments of his clients and his family. His first book, MONEY WISE: How to Create, Grow and Preserve Your Wealth (St. Martin's Press) was published in September, 2008. Mike’s unique perspectives on world markets and their implications have been posted weekly at Mike Lipper’s Blog since August, 2008.

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Comments (1)

Jeremy Robson profile picture
I don't much give a fig what Ms Yellen thinks. The Fed are the worst predictors out there.
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