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The Main St Federal Reserve: Part 1

|Includes: SPDR S&P 500 Trust ETF (SPY), VXX

The Federal Reserve is the central banking system of the US. Created back in 1913 as a response to a series of financial panics. Over the years the roles and responsibilities of the Fed have greatly expanded, and its structure has evolved to great extents. This being said the roles of the Fed Chair has greatly expanded.

Janet Yellen, the current Fed Chair, is formerly a Harvard professor, Berkeley professor, London School of Economics lecturer, and Brown/Yale graduate. This being said, Yellen is an academic. She has a strong understanding of economic theory and policy. However, in the financial markets this is not always the best thing. Economy theories rarely line up perfectly.

Yellen is currently waiting for a number of factors to line up so that "by the books" it makes sense to increase interest rates. Meeting after meeting she leaves the interest rates unchanged. Waiting anxiously for positive economic data. This data, in her eyes, may never happen. Despite the unemployment rate being at all time lows, consumer spending is increasing, and corporations will continue their buybacks as they're getting capital practically for free (0.25%) from the govt.

Bernanke on the other hand is formerly a trader. A successful and incredibly lucrative trader. Therefore, in order to improve the state of the markets he knew he had to "make a trade". He understood the risks and rewards of this trade, and he made it. He issued a number of different quantitative easing policies, which at the end of the day did benefit our economy. Granted some might say that he jumped the gun on QE3, however this was just another trade to Bernanke. Did it pan out well? Many will argue it did. Sending the markets to all time highs month after month throughout the 2013 FY.

Will Yellen catch onto this? Probably not. She considers the economy to be an academic practice. Waiting for all the stars to align, which might not ever happen. One economic theory that we, at Main Street Trading, believe is not true is that the market takes a random walk. Most simply, statistics state that in order to get from 1 to 3, you need to pass through 2. Therefore stating that the market does not take a random walk. In order for the economy to go from a recession to an expansion, you need to go through equilibrium first.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.