<July 1, 2020>
As proponents of free markets, we are constantly on the lookout for catalysts that will cause the Federal Reserve to lose control of asset prices. Through the Federal Reserve’s asset purchase programs, we believe asset prices are being set at levels central bankers, not market participants, deem appropriate. In such an environment, market participants are price takers, not price makers, and as a result, it is difficult for markets to function efficiently and freely.
While beneficiaries of asset inflation likely view the Fed’s heavy-handed approach positively, many absolute return investors view central bank intervention as a risk to future returns, and even their livelihoods. In fact, one of the concerns we hear most often from like-minded investors is the possibility that central bank intervention is permanent and that freely functioning markets are a thing of the past. Specifically, there’s a growing risk to absolute return investors—who rely on the ebbs and flows of market cycles to succeed—that this time is different and that the Fed will remain in control of asset prices indefinitely.
Although we share similar concerns, we can think of several catalysts that could cause the Federal Reserve to lose control. The most obvious, in our opinion, is a sudden and sharp decline in the U.S. dollar. For instance, we can envision a day when foreign investors come to the realization that the currency backing their U.S. investments is being replicated too easily and too carelessly. In effect, foreign investors may reconsider their classification of the U.S. dollar as a safe haven. We often ask, how can a currency that is being recreated in such large quantities—without sacrifice or effort—be considered a dependable store of value and not be at risk of meaningful depreciation?
Rising inflation and an uncooperative bond market would also be high on our list of possible catalysts that end the Fed’s grip on asset prices. The more dollars the Fed prints, the greater the odds newly created dollars spill out of financial assets and into the real economy. Although the current recession has reduced inflation over the past few months, we believe supply disruptions in many goods and services, along with the birth of trillions of new dollars, could cause inflation to increase in coming months.
And finally, there is the increasingly disturbing trend in wealth inequality in the United States. Although Chairman Powell has consistently denied the Fed has contributed to rising inequality, we believe their role in inflating asset prices is indisputable. In our opinion, the combination of a 0% Fed funds rate, along with the trillions of dollars created to purchase assets, has been an explosive accelerant in inflating bond and stock prices. It’s clear to us, these policies have caused the rich to get richer, while those without financial assets have not benefited proportionately. In effect, by maintaining financial stability, we believe the Federal Reserve has inflated social instability.
As a potential solution to rising wealth inequality, we have devised a plan that would diversify the Fed’s asset purchase program and broaden the distribution of their newly created dollars. Specifically, we recommend the Federal Reserve purchase something other than government bonds, mortgages, and corporate debt. Why should holders of financial assets be the primary beneficiaries? Are asset holders any more deserving than let’s say…pet owners? We don’t think so. In fact, today we are officially proposing that the Federal Reserve purchase all of the cats and dogs in the United States. The Fed will put up the money and will outsource the caregiving to pet owners (like BlackRock buying the Fed’s corporate bonds), so you get to keep companionship of your beloved animal. Instead of QE, we will call it MCD—Monetizing Cats and Dogs.
There are many benefits of MCD. First, we believe it would distribute the Fed’s newly created money more evenly. For instance, according to Statista, 67% of all U.S. households owned at least one pet in 2019, with most consisting of either a cat or dog. This compares to only 55% of Americans that own stocks directly or in their retirement accounts (based on a 2020 Gallop poll). Furthermore, unlike the Fed’s current asset purchase program, monetizing cats and dogs would not benefit the rich so disproportionately. For example, based on a 2017 Washington Post article, 84% of stock ownership was confined within the top 10% of the population (categorized by wealth). Pet ownership, on the other hand, is much more broadly distributed among the less affluent, with the majority of pet owners making less than $100,000 a year.
With rising wealth inequality becoming increasingly difficult to defend, we believe it is time to redirect the monetary hose away from stock and bond holders and towards cat and dog owners. As concerned citizens that happen to have dogs, we propose $30,000 payments to the owner of every dog and cat in the United States. We also propose funding our pet monetization plan with printed money. With approximately 76.8 million dogs and 58.3 million cats in the U.S., we estimate our pet monetization plan will cost approximately $4 trillion, or similar to the Fed’s recent balance sheet expansion. Since we would use printed money, our plan does not require higher taxes or spending cuts, only a few generous keyboard strokes from Chairman Powell.
If the Federal Reserve purchasing cats and dogs sounds absurd, of course it is. Driving up the price of things or assets that only benefit a select group of the population is absurd. But that’s where we find ourselves today. With an unlimited balance sheet, the Federal Reserve, in theory, can inflate and set the price of anything. How far and how long can these policies be maintained, we’re not certain. However, as wealth inequality grows, we believe the secret of its origin will ultimately be revealed to the general public and will be increasingly difficult to defend. At that time, if the financial markets haven’t taken away the Federal Reserve’s ability to control asset prices, we’re confident voters will find a way. Until then, we suggest going to your local animal shelter and loading up on cats and dogs. It’s an investment with little downside—if our plan is implemented, they’ll be monetized, if it is not, you’ll adopt a new best friend!
The Palm Valley Capital Fund can be purchased directly from U.S. Bank or through these fund platforms.
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.