Jerome Powell: Rooster Today, Feather Duster Tomorrow?

Magazine covers and headlines are a reflection of social mood…often serving as a good contrarian indicator.

The 2 November 2020 issue of Barron’s proclaimed US Fed Chairman, Jerome Powell, The Winner.

Boldly stating that no matter what happens with the US election, the Fed Chair is ‘the stabilising force for the economy and markets.

Port Phillip Publishing

Source: Trading Economics

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The winner of what?

Printing the most amount of money in the shortest amount of time? For putting the final nail in the coffin of savers by taking rates to zero? In having encouraged youthful and not so youthful speculators to sign up in their droves to open up Robinhood accounts?

Society has lost sight of the fundamentals

This isn’t winning, it’s losing. Big time. Society has lost sight of the fundamentals.

Producing US$3 trillion out of thin air, penalising retirees, turning Wall Street into an even bigger casino…this is so far removed from sound financial management it’s not funny.

Anyone who went to (but not necessarily passed) grade 10 could have done what Powell did.

Nothing in his panic, print, punish and punt strategy required strength of character.

How any of these stopgap measures have stabilised markets or the economy truly escapes me.

False stability only creates greater real instability, posing an even bigger threat to markets and the economy.

And who knows, next time round, more of the same might not work.

On 28 October 2020, the former Governor of the New York Federal Reserve, Bill Dudley, wrote an article in which he questioned the usefulness of further rate cuts…

…the rate on a 30-year mortgage stands at about 3%. If the Fed managed to push that down by another 0.5 percentage points, what difference would it make? Hardly any. Moreover, the stimulus provided by lower interest rates invariably wears off. Cutting interest rates boosts the economy by bringing future activity into the present. Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing.

Bloomberg Opinion

Finally, someone speaking some sense. Dudley’s assessment on the futility of the Fed’s losing strategy should serve as a timely reminder to all those who believe the Fed can save us from ourselves.

In accepting to put his face on the cover of Barron’s, Powell must have known he was tempting fate.

The 3 September 1929 edition of The New York Times quoted famed Yale economist, Irving Fisher…

Port Phillip Publishing

Source: NYT

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The following month, October 1929, Fisher’s permanent plateau turned into a crater.

According to the Economic History Association’s article ‘the Great Depression’… (emphasis added):

Irving Fisher, one of the leading economists in the U.S. at the time, was heavily invested in stocks and was bullish before and after the October sell offs; he lost his entire wealth (including his house) before stocks started to recover.

The front page of the 15 November 1972 edition of The New York Times proudly reported ‘Dow Jones Closes Above 1000 Mark For the First Time’.

Port Phillip Publishing

Source: NYT

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The Dow only held above the 1,000-point level for a couple of months.

It would be another decade before the Dow permanently breached the psychological 1,000-point barrier.

Port Phillip Publishing

Source: Macrotrends

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In the interim, the US market took investors on a wild ride to nowhere.

Investors had reached such a point of exhaustion; the market was being read its last rites on the 13 August 1979 cover of BusinessWeek.

Port Phillip Publishing

Source: BusinessWeek

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Declarations of the market’s death were a tad premature

In the early 1980s, the then Fed Chair Paul Volker — there was a real winner who stood tall and took the tough decisions — tamed the inflationary forces in the US economy…and the market was off.

The 15 February 1999 edition of Time featured another group of winners.

Alan Greenspan, Bob Rubin, and Larry Summers were the Committee to Save the World.

The trio won this accolade for their handling of the Asian crisis.

Port Phillip Publishing

Source: Time magazine

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A decade later, the trio’s reputations were in tatters thanks to the roles they played in creating the regulatory free-for-all that gave us the GFC.

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Almost two decades after knocking on death’s door, the 30 March 1999 edition of The Wall Street Journal announced the market had well and truly been resurrected…Dow Jones hits 10,000 points.

Port Phillip Publishing

Source: The Wall Street Journal

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Take a close look at the headline for the article beneath the Dow hitting 10,000.

If this is a bubble, it sure is hard to pop.

Well, a little over 12 months later, it did pop. The NASDAQ index would fall almost 80% in value.

In response, Greenspan adopts the ‘winning’ strategy of slashing interest rates. The US housing market goes nuts.

In 2006, Greenspan hands over the Fed’s reins to Ben Bernanke.

On 28 March 2007, bumbling Ben made this comment (emphasis added):

At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

And backed it up on 17 May 2007, with this (emphasis added):

All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. 

Ben’s complete misreading of the instability building within the system delivered upon us the Global Financial Crisis.

After completely trashing the place, Ben prints money to finance all sorts of crazy schemes and drops rates to 0.25%.

Hmm, that strategy sounds familiar.

And what does Time magazine do in December 2009? It makes Benny boy ‘Person of the Year’.

Port Phillip Publishing

Source: Time magazine

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The man has no shame.

On 26 January 2017, the Dow surged through the 20,000-point mark.

Note the byline under the headline ‘Last 1,000 points come in just 42 days.

Truly an amazing feat when you consider the permanent breach of the Dow’s first 1,000 points took more than eight decades to achieve.

Port Phillip Publishing

Source: The Wall Street Journal

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No sooner had the Dow raced through the 20,000-point level, before the January 2017 edition of Barron’s had it sprinting towards the next one…

Port Phillip Publishing

Source: Barron’s

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The fine print on the cover states:

The Dow hitting 20,000 was no fluke. Today’s stock prices are well supported by corporate earnings and economic growth…

In fact, based on the Fed’s own data, US Corporate profits have flatlined since 2012. Proving that you never let the facts get in the way of a good story.

Port Phillip Publishing

Source: Federal Reserve Economic Data

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The Dow 30,000 is tantalisingly close.

But will the Dow permanently plateau at that level or is it going to be a fleeting visit?

Jerome Powell may have won the most recent market battle, but I’m not so sure he’s equipped to defeat an all-out market assault.

If history is a guide, it’s worth remembering that today’s rooster can quickly become tomorrow’s feather duster.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion