<September 10, 2020>
The summer is coming to an end in Florida, and you know what that means. It’s little-league baseball season! Actually, it’s always baseball season in Florida—it never seems to end. Even COVID-19 couldn’t shut it down. After a few weeks of uncertainty, the kids were back on the fields.
If you have children playing baseball, or organized sports for that matter, you’re likely familiar with the phrase “daddy ball.” For those less familiar, daddy ball is used to describe a team coached by a parent who plays his or her kid over other kids, even if the players on the bench are more talented. Although the phrase has a tendency to be overused by frustrated parents, daddy ball definitely exists and comes in a variety of shapes and sizes. Regardless of its severity or how it’s implemented, in the end, daddy ball is just another form of favoritism.
As we assess the current investment environment, we can’t help but notice an extraordinary amount of favoritism emanating from the Federal Reserve and its head coach, Jerome Powell. When we first learned of Coach Powell, we were optimistic he would be a great coach, having a fair and sensible game plan. Based on his tryouts, practices, and even his first season, Coach Powell was living up to expectations.
When Jerome Powell began coaching Team Fed on February 5, 2018, he seemed to be doing everything right. Based on his starting lineup, it was apparent that Coach Powell was committed to winning with fundamentals and hard work, not the trick plays and monetary gimmicks used by former coaches Greenspan, Bernanke, and Yellen. His starting players were very talented and had a history of winning championships. Daddy ball was nowhere to be found!
Coach Powell’s 2018 batting order began with two of our favorite players, Rising Interest Rates and Balance Sheet Normalization. Both former league MVPs were happy to return to the lineup after being forced into early retirement by Coach Bernanke. Throughout the 2018 season, Rising Interest Rates and Balance Sheet Normalization played very well and appeared to be enjoying their leadoff roles.
Batting third and fourth, Coach Powell started former all-stars, Savers and Positive Real Rates. After a decade of sitting on the bench and being apart, Savers and Positive Real Rates were finally reunited. Throughout the entire 2018 season, Savers and Positive Real Rates were back to their winning ways, beating inflation by an increasing margin.
To bring everyone home, Coach Powell had 99% of the Population batting fifth. Gone were the days of narrowly distributing playing time to The Top 1%. The unemployment rate was low and declining throughout most of the 2018 season, while stock prices were allowed to fluctuate and in certain periods, even allowed to fall! 99% of the Population was a crowd favorite—never too important to mingle with fans and sign autographs.
Coach Powell placed Fiscal Responsibility in the sixth spot, which took the place of Fiscal Deficits and Debt Accumulation. While Fiscal Deficits and Debt Accumulation were entertaining to watch, they were inconsistent and could wipe-out even the strongest of teams. Coach Powell understood this well and openly expressed his concerns prior to coaching the team. During tryouts Coach Powell said, “It’s [fiscal deficits and debt] a long-run issue that we definitely need to face, and ultimately, will have no choice but to face.” Once Powell become head coach, starting Fiscal Responsibility and benching Fiscal Deficits and Debt Accumulation was consistent with his tryout speeches.
At seventh, Coach Powell decided to go with Young Families and Future Generations. By reinstating Rising Interest Rates and Balance Sheet Normalization, Coach Powell was no longer committed to favoring Existing Asset Holders. While asset inflation is wonderful if you already own assets, if you’re attempting to accumulate them and raise a family, it can be quite a hindrance. With Young Families and Future Generations finally getting a turn to bat, many fans hoped past starters, Declining Birth Rates, Living in Your Parents’ Basement, and Relentless Asset Inflation, would finally hang up their cleats!
After many years on the bench, Disciplined Value Investors finally made it back into the lineup, batting eighth. Coach Powell’s decision to favor Disciplined Value Investors was not surprising considering his past comments related to quantitative easing. When asked why Team Fed would stop expanding its balance sheet at $4 trillion, Powell said, “It will never be enough for the market.” In effect, Endless Asset Purchases and The Fed Put were benched, allowing Disciplined Value Investors to finally get some much-deserved playing time.
And finally, batting ninth, Coach Powell penciled in Free Markets and Price Discovery. For years Team Fed’s asset purchases inflated and manipulated asset prices. With Quantitative Easing sitting on the bench, interest rates and asset prices were able to move freely and better reflect their underlying fundamentals. Going forward, prices would be set by market participants, not large price insensitive bids from central banks. With Coach Powell in charge, the game would be played honestly and as intended!
As the 2018 season started, things were going great. Savers and 99% of the Population were playing particularly well. However, as the 2018 season was wrapping up, Team Fed took a stumble, losing a few games to Market Volatility. Unfortunately, and to our surprise, instead of managing through the season with its championship-caliber team, Coach Powell tore up his fundamentally sound game plan. In fact, the entire 2018 lineup was benched!
Coach Powell’s new lineup (listed below) was known to do whatever it takes to win, even if it meant playing dirty or taking performance enhancing drugs. Few understood why Coach Powell changed directions so abruptly, but many believed it was due to pressures coming down from the front office and Powell’s fear of losing his head coaching position after only one season.
Sadly, as the 2018 season ended and the 2019-2020 season began, daddy ball was back. The good players were on the bench and the less talented players were getting all the playing time. One of our favorites, Rising Interest Rates, was replaced with Falling Interest Rates. Falling Interest Rates’ stats and batting average had much to be desired, quickly approaching 0%!
Balance Sheet Normalization was also benched and replaced with Debt Monetization and Asset Purchases. As Team Fed’s balance sheet swelled, rumors of monetary steroids quickly surfaced!
After benching Savers, Speculators came rushing back into the lineup eager to meet its old teammate, Negative Real Rates. Speculators and Negative Real Rates started even though they had a history of playing carelessly and providing meager yields.
Despite fan protests, The Top 1% returned to the lineup, as 99% of the Population found itself sitting back on the pine. As of December 31, 2019, The Top 1% owned 54% of the U.S. equity market—an obvious example of favoritism and daddy ball!
Record Fiscal Deficits was back in the lineup as well. Commenting on its benching, Fiscal Responsibility said, “You know, I thought we played hard and we were hoping to finish out the season. But hey, Record Fiscal Deficits has plenty of experience on this team and understands how the game is played.”
And finally, Young Families and Future Generations, Disciplined Value Investors, and Free Markets and Price Discovery were also benched. Despite their well-known shortcomings in previous seasons, Coach Powell was favoring Here and Now, Growth Investors and Robinhood Traders, and Coach’s new favorite rookie, his son, The Powell Put!
While the intention of daddy ball is usually to help, it can be quite harmful. Players handed positions without working for them are less likely to practice or play hard. As a result, beneficiaries of daddy ball may develop into less talented and less competitive players. Daddy ball can also be counterproductive for the team and is typically unsustainable. The team often loses its competitiveness or breaks apart from within, with parents revolting and the coach losing control.
Maintaining control while favoring undeserving players is the foundation of daddy ball. It also happens to be the key to sustaining the current market cycle. Will Coach Powell and Team Fed be able to keep it together for the remainder of the season? We’re not certain, but we’ve seen enough daddy ball to know how teams built on favoritism generally end. Whether it’s this season or next, we believe parents (grown-ups) will revolt, Coach Powell will lose control, and the team’s fair-weather fans will be deeply disappointed. And for the talented players sitting on the bench who are frustrated and confused: Keep your chin up, continue to work hard, and be patient—your time will come!
The Palm Valley Capital Fund can be purchased directly from U.S. Bank or through these fund platforms.
Index performance is not indicative of a fund’s performance. It is not possible to invest directly in an index. Past performance does not guarantee future results. Current performance of the Fund can be obtained by calling 904-747-2345.
There is no guarantee that a particular investment strategy will be successful. Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.
Fund holdings and allocations are subject to change and are not recommendations to buy or sell any security. Current and future portfolio holdings are subject to risk.
Estimates are based on predictions and subject to change.
Definitions:
S&P 500: The Standard & Poor's 500 is an American stock market index based on the market capitalizations of 500 large companies.
Powell Put: The Powell Put is a name that implies the Federal Reserve and its Chairman, Jerome Powell, will protect investors from falling prices through monetary policy.