Donald Trump is a household name. I would bet that most Americans could not identify Jerome “Jay” Powell. This is a paradox because Jerome Powell is arguably more powerful that Mr. Trump. How can that be, you might ask? Mr. Trump, as he tries to affect policy, must contend with a system of checks and balances designed by our country’s founding fathers. Mr. Powell, as Chair of the Federal Reserve, is much less constrained. He and his team at the Fed set the course of interest rates, which in turn have a major influence on economic growth, and on the prices of stocks, bonds, houses, and other risk assets.
Mr. Powell (The Wizard), while utilizing economic data to steer the economy, also looks to history as a guide to what works and what does not. He understands the aphorism, “John Bull can stand many things, but he cannot stand two percent.” John Bull is an imaginary English figure, a personification similar to the America’s Uncle Sam. John Bull’s distaste for two percent drives him to move his low-yielding fund balances into stocks, bonds, real estate, and other risk assets, where he believes he can earn a better return. Thus, when The Wizard wants to encourage John Bull, he lowers the cost of money, i.e. interest rates. Prices for risk assets go up, animal spirits are boosted, lending increases, businesses expand, companies hire people, people buy more, and so on. A virtuous circle is thus orchestrated by The Wizard, which greatly pleases John Bull and Uncle Sam.
Question … is there a point at which our wizard is unable to work his magic and elevate markets? As George J.W. Goodman (pen name ‘Adam Smith’) so eloquently wrote in his 1968 classic book, The Money Game:
“We are at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know at some moment the black horsemen will come shattering through the terrace doors wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time. So everybody keeps asking — what time is it? But none of the clocks have hands.”
Happy June … stay tuned.
My office hours are typically 7:30 AM - 4:00 PM. Pick up the phone and let me know what’s on your mind. If you know someone who could benefit from a second opinion, please tell them to call me. In the meantime, I greatly appreciate your trust and friendship, and thank you for the opportunity to be of service.
Any opinions are those of James Aldendifer and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The above situation is a hypothetical example for illustration purpose only and does not represent an actual investment.
