The Stench around the Fed Is Putrid

It’s no secret that central bankers suffer from an acute form of superiority complex.

They wield enormous power. Sit in wood-panelled boardrooms. Enjoy corporate hospitality at the finest restaurants. Are fawned over by the Davos crowd.

They go to bed each night thinking…

  • ‘We and we alone will dictate what the cash rate should be.’
  • ‘We and we alone will decide for how long the printing presses should run to provide backdoor financing to a government that lacks the discipline to exercise budgetary restraint.’
  • ‘We and we alone will dictate the pricing mechanism of asset markets.’

Here in the real world, we know all too well their distorted and irresponsible policies have blown bubble after bubble after bubble.

Yet, mystifyingly, these pompous blowhards continue to occupy positions of privilege and power.

If we’d have stuffed up as badly as them, the Centrelink queue would await us.

When you consider yourself superior to and above everyone else, it can lead to overreach…laws for the common folk don’t apply to you.

Remember this?

Former Federal Court judge Marcus Einfeld has been sentenced to at least two years in jail for lying to evade a speeding fine three years ago.

Sydney Morning Herald, 20 March 2009

You and I would’ve copped it sweet and paid the fine.

And speaking of jail time, Dayakar Mallu is facing the prospect of spending the next 25 years in the big house.

Dayakar who?

Glad you asked.

To quote from the US Department of Justice media release from 17 September (emphasis added):

According to court documents and his admissions in court, Dayakar Mallu, 51, of Orlando, Florida, admitted that between 2017 and 2019 he conspired with others to trade in the securities of Mylan N.V., a NASDAQ-listed public company, in advance of corporate announcements concerning drug approvals, financial earnings, and a merger. Mallu, who was at the time Vice President of Global Operations Information Technology of Mylan…he ultimately realized net profits and losses avoided of more than $4.2 million from his insider trading.

Dayakar was a naughty boy. He was caught red-handed with his hand in the corporate cookie jar. Dayakar abused his inside position to front-run his company’s stock.

What’s any of this got to do with central bankers?

Again, I’m glad you asked.

Our story begins with The Rum Rebellion on 31 August 2021:

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 Office of Government Ethics (does government 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.

Based on the range of information provided by Jay, the good folk at Calderwood Capital Research have created the following pie chart on the Powell’s asset allocation:

Powell's net worth distribution calculated from the OGE Filing

Source: Calderwood Capital Research

[Click to open in a new window]

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.

Powell’s personal portfolio allocation means he has an obvious conflict of interest.

In accepting the role as Fed Chair, Powell should have been forced to remove any potential conflict and liquidate his portfolio.

That story was a month ago.

Little did I know then that Powell’s conflicts of interest were about to be overshadowed by others within the Fed.

This is from the 22 September edition of The Rum Rebellion:

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On 9 September 2021, The Wall Street Journal published an article titled “Two regional Fed chiefs to sell stocks to avoid appearance of conflict of interest”.

Here’s an extract (emphasis added):

“The leaders of the Boston and Dallas Federal Reserve Banks said they would sell off individual stocks they own, invest the proceeds in diversified indexed funds or cash savings and cease trading in individual securities.

“The Thursday announcement comes after the Federal Reserve Bank of Dallas this week disclosed that its president, Robert Kaplan, bought and sold millions of dollar in stocks and other investments in 2020. A disclosure from the Boston Fed showed that its president, Eri Rosengren, also was an active trader last year, albeit at a smaller scale.

“Both men defended their actions as consistent with their respective bank’s code of conduct policies, but said they didn’t wish to create any perception that their trading of securities and investments would conflict with their role in setting monetary policy.”

Create the perception of a conflict of interest?

This statement just shows you how out of touch and arrogant these people are.

You are sitting in the room deciding on a policy setting that can positively or negatively impact your personal financial (and/or trading) position. Gee, what do you do?

As at 9 September, Kaplan and Rosengren were hanging in there.

No offer of resignation was made.

But this blatant misuse of power is so rotten, not even the usually teflon-coated central bankers could dismiss this in their usual high-and-mighty, offhanded manner.

As reported by NBC News on 28 September (emphasis added):

Dallas Federal Reserve President Robert Kaplan became the second regional central bank leader to resign Monday, saying he was stepping down early following a recent controversy over stock market trades he made.

Kaplan’s early retirement follows an announcement earlier in the day from Boston Fed President Eric Rosengren, who said he will leave. He cited health concerns, and not the issue over his investment portfolio activity.

Health concerns? Was he sick in the guts because he got found out?

If you want to read more on the murky details of Robert Kaplan’s trading activities, you can do so here. It’ll make your blood boil.

And the news just goes from bad to worse for the Fed.

To quote from Reuters on 2 October (emphasis added):

U.S. Federal Reserve Vice Chair Richard Clarida traded between $1 million and $5 million out of a bond fund into stock funds one day before Chair Jerome Powell issued a statement indicating potential policy action due to the worsening of the COVID-19 pandemic, Bloomberg News reported on Friday.

The culture within the Fed is rotten.

What Kaplan and Rosenberg are alleged to have done is no different to what Dayakar Mallu has pleaded guilty to.

Prima facie, the former and current Fed officials appear to have used their inside position to turn a tidy profit for themselves.

So why haven’t they been questioned by the Department of Justice and/or SEC?

Well, there might be some good news on that front.

According to the 5 October edition of Daily Mail UK, experienced Democrat Senator Elizabeth Warren is on the case (emphasis added):

Senator Elizabeth Warren…is demanding that the US Securities and Exchange Commission (SEC) open an investigation into three top Federal Reserve officials’ potential ‘insider trading’ during the COVID-19 pandemic on Monday.

In a letter to SEC Chair Gary Gensler, Warren asked him to probe securities trading of Fed Vice Chair Richard Clarida, Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren after stunning reports emerged they cashed in on the market while millions of Americans were reeling from the pandemic’s economic effects.

The progressive senator also took aim at Fed Chair Jerome Powell, hinting that he knew they violated insider trading rules and did nothing to stop it.

“If these trades were based on Fed officials’ knowledge of non-public, market moving information, they may have represented potentially illegal activity,” Warren wrote.

While Democrat Senator Warren’s initiative is to be applauded, we should recognise she might be acting out of political self-interest…Jay Powell was a Republican Trump appointee.

Either way, I sincerely hope she maintains a very public pressure on the SEC.

If these entitled Fed officials have overreached and used inside information to front-run and profit from the market, they deserve to share a cell with Dayakar Mallu.

The sweet smell of justice would go some way to masking the rotten stench coming out of the Fed.


Vern Gowdie Signature

Vern Gowdie,
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.

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.

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