‘The virtues are lost in self-interest as rivers are lost in the sea.’
Franklin D Roosevelt
‘Men are moved by two levers only: fear and self-interest.’
‘Individuals motivated by self-interest, self-indulgence, and a false sense of self-sufficiency pursue selfish ambition for the purpose of self-glorification.’
In a previous life, Fed Chair Jerome (Jay) Powell worked in investment banking.
If the numbers on his net worth are accurate, Jay did alright for himself. Amassing an estimated personal net worth of US$55 million.
As a high-ranking public official, every year Jay must file a 278e Form with the United States Office of Government Ethics (do government’s actually have any ethics? A question for another day).
While not revealing exact amounts, the 278e form requires disclosure of income and assets outside of Jay’s remuneration from the public purse.
Here’s a copy of Jay’s latest 278e disclosure.
Based on the range of information provided by Jay, the good folk at Calderwood Capital Research have created the following pie chart on Powell’s asset allocation:
Source: Calderwood Capital Research
If you were the person in charge of pumping up the market’s tyres and deflating those of the savers, then of course you’d be overweight shares and underweight cash.
With almost 60% of his personal wealth in equities (shares), Jay has at least 33 million reasons to make sure asset prices remain inflated.
And in looking at Jay’s term in office, we see that when the market deflates, virtue is forsaken and self-interest kicks in.
Powell took office on 5 February 2018. He started with good intentions…easing back on the prolonged post-GFC stimulus.
The first order of business was to start reducing the Fed’s balance sheet (blue line) and maintaining the course on normalising interest rates (red line).
Powell’s steady-as-she-goes approach worked well for a couple of years…the S&P 500 Index was up 27%.
In his early days, Jay did a pretty good job in balancing his self-interest and public interest.
A win-win situation…until March 2020.
The coronavirus meltdown hit hard, and Jay’s 33 million reasons suddenly shrank by one-third.
Rather than accept this as ‘markets doing what markets do’ and correcting an imbalance between value and price, Jay abandoned public interest for self-interest.
If he didn’t do something quickly, the remaining two-thirds of his family’s equity exposure might wither away to a much lower number.
When your portfolio is overweight shares and underweight cash AND you control the financial levers, what do you do?
Or more to the point, what don’t you do?
Don’t reward the prudent…those with a higher proportion of their savings in cash. My family needs the money more than those conservative schmucks do.
Don’t allow markets to undertake an independent process of price discovery…because we know they’ll find there’s bugger all value…and that won’t be good for the Powell family.
Don’t let overindebted zombie companies go to the corporate graveyard. If they do, the defaults might reveal the extent of the fraud the Fed has been covering up.
And most importantly, don’t let my family wealth take another serious hit.
With the list of ‘do nots’ established, the ‘do’ list actually becomes a one-line sentence.
Do whatever it takes to reverse market fortunes.
Drop the cash rate like a stone. Crank up the presses and expand the Fed’s balance sheet.
And in doing so, Powell opened the Fed’s ‘jaw’ (even wider than Bernanke did in 2008/09) and breathed life into the market.
Powell’s self-interest won the day. Public interest be damned. The long-term damage from this reckless strategy will be for the next Fed chair to worry about.
His family’s 60% equity stake is now worth a whole lot more than it was BEFORE the March 2020 collapse. Well done, Jay.
This is not a good look for someone who is meant to be managing the world’s largest economy in a balanced and prudent fashion.
But when you live in a central bank bubble, the public are mere plebs and therefore, their perception of you counts for nought.
The accolades and ego-stroking of the Davis crowd is what you really crave.
I wonder if Jay has seen the following chart on the current reading on the average of four valuation indicators?
In the process of saving, restoring, and then enhancing his family’s financial position, Powell has created the most expensive market in history.
The average of these four well-established valuation metrics is within a whisker of an unprecedented four standard deviations above the MEAN.
This easily exceeds the infamous 1929 and 2000 market peaks.
Source: Advisor Perspectives
In dollar terms, a deviation of this magnitude means around US$20-plus trillion of illusory wealth needs to be clawed back by an equally-historic BEAR market.
If there is any justice in this world, then Powell’s personal wealth hopefully takes a sizeable hit when Wall Street next goes over the cliff.
And I suspect justice will be served.
Powell’s ego will keep him fully invested.
As CJ Mahaney said, those motivated by self-interest pursue selfish ambition for the purpose of self-glorification.
Powell has proved to be every bit as conceited, pompous, and full of his own self-importance as his bubble-blowing predecessors Greenspan, Bernanke, and Yellen.
In believing his own PR, Powell, safe in the knowledge he alone can reverse any personal misfortune will maintain an overweight equity position.
But Powell might be in for a surprise next time around.
Maybe, just maybe, the speculators don’t show up and there is no rapid and rabid recovery.
Perhaps, investment managers take Powell’s next round of liquidity and redirect it into commodities and precious metals. Sending a different asset class through the roof.
One way or the other, this market is going to revert to the MEAN. Always has and always will.
When all is said and done, market forces are far more powerful than a Fed’s chair vested interests.
After the dust settles on this period of blatant excess, Jay might only have 10 million reasons left.
Don’t feel too sorry for him. No doubt a cushy seven-figure gig back in investment banking awaits Jay.
Sadly, for those who believed Powell’s BS, a far more uncertain future awaits.
Maybe it’s time investors started to act out of self-interest and begin protecting their capital from the fallout of Powell’s abandonment of public interest.
Editor, The Rum Rebellion
PS: Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.