Inflation Insights: Warsh Approach

Welcome to the Accumulating Wealth podcast. I’m Judson Crawford. And I’m Hunter Satterfield. We are CPAs, wealth advisors, and partners at CWA, a financial services firm here to help you navigate the decisions you face every day. Today, we’re talking about Kevin Warsh taking over as Fed chair and what that could mean for the economy and markets. 

Anytime there’s a new voice leading the Fed, investors pay attention, especially when it comes to rates, stocks, and bonds. So we’re bringing in Brad Sanders, our resident market specialist, to help break down what this could mean for investors. Let’s go. 

Okay, Hunter, here we sit. Today is August 12th. Summer has flown by. Indeed. I’m excited to have story time with Brad. Welcome, Brad. Thanks. Yeah. Yeah, summer has just sailed by, and man, it was fun recording 300 and hearing from some, some of y’all after you’ve listened to that, so thank you for that. And for those that haven’t been able to listen to it yet, go. It’s a fun one.  

But we’re back from the summer, Judson. We’ve got some incredible stuff teed up, listeners for the fall. We’re going to do a series on data centers, which I think will be fantastic. Just what they are and what they mean in our daily life and what’s the future of them. We’ve got an expert coming in on that. So that’ll be really cool. 

We’ve got the CEO of one of the largest investment institutions in the United States is going to join us for a two-parter on some really cool… She’s going to be amazing, right, Judson? It’s going to be awesome. Yeah. That one’s going to be really, really cool. So, we’ve got that coming on. 

We’re going to double-click a little bit on risk too, right, Judson? Yeah, we’ve got a couple different guests coming on to talk about different types of risk and how that affects not only you, but your portfolio. Like I said, we’ve got a lot, and I’m sure within all of those, there will be some events that will cause us to drop a couple extra. Always. Yeah, some scatter shooting. So it’s going to be an awesome fall, folks so make sure you tune in for those. We’re excited about them. 

Today we’re talking Fed, and Judson, before we get to sort of your opening question, super important to mention, if you want to go back, like we actually went through, listeners, a whole history of the Federal Reserve and all of the inner workings of it. Super interesting. It’s episode 155. So, if you haven’t listened to that or if you want to re-listen before listening to the Warsh podcast that we’re about to record, that’s a good place to start, so. Absolutely.  

So, you know what we’re talking about. We’re talking about the Fed, why it’s important. Before I get to my question I do want to bring up if you weren’t a listener or didn’t listen back in the day when we recorded episode 155 with Brad, that was a basically detailed history of the Fed which, if you’re interested in what we talk about today, it gives some good history of the Fed, some of the reasons we have it. Definitely something to look back on. 

Yeah, for sure. So, Judson, you had an intro question that you wanted to start us off with. Let’s go there. Yep. So, I’ll let you guys answer this. Would you rather live in a world with 3% inflation and a 6% mortgage rate, or live in a world with 6% inflation but get a 3% mortgage rate? 

I’m going to cheat because my mortgage is fixed for 30. That’s true. So I’ll take the lower inflation and the higher rates overall. But It’s a fascinating question. If I didn’t have that I think I still would probably go higher mortgage rates, lower inflation because it’s more controllable, from my perspective. But Brad, what about you? 

Yeah. You definitely want lower inflation, higher rates. I mean, as a saver, right? Like, be able to put your money in the bank and earn a higher rate is the most important thing. That high of inflation over time is super destructive. 

Like, if you owned your home, you’d be sitting there going, “Oh, my home’s basically free,” in that environment is a way to think of it, but your grocery bill’s never going away, right?  

Well, I think, what’s interesting about it is that we lived in a world for a long period of time where we had the best of both worlds. Yeah. We didn’t have inflation, and we had extremely low rates. And so yes, a lot of us who bought homes back pre-2020, have low rates. But now we’re seeing, I think for the last couple of years, a lot of our consumers are really feeling what inflation feels like for the first time. 

Absolutely, and I think that the world that we lived in for the last 20 years, and again, this goes back to a little bit of our previous episode on the previous Fed chairs, that’s not a realistic world for us. It’s not sustainable in the United States for us to run $40 trillion balance sheet in debt. 

And so, a world where we have very low inflation and very low rates, that’s just not something by any stretch we want to get back to. It’s not a healthy economy overall or a macro standpoint because you have to basically artificially get there, right, Brad? 

Yeah, I mean, you have to have, like, a financial crisis preemptively, to get there. And really the reason we were in that scenario is if you look at something like the Taylor rule after the great financial crisis with un- unemployment as high as it was, the Fed would’ve had to cut rates to, like, negative 3% in order to do what they ended up doing with QE, and that would’ve destroyed our banking system. 

If you look at the European banking system, all the banking equities are still down 90%, since the ’90s because they’ve had run negative real interest rates, and it just, you can’t run a healthy banking system that way. So, yeah, I mean, you have to have something massive happen. You have to have kind of a blow up the balance sheet of the United States in order to. 

So, the guy we’re talking about today, talking about the big financial crisis, the guy we’re going to talk about today, he was part of that, right? Yeah. Absolutely. And I think that’s a really good segue to Kevin Warsh, because folks, the reason we’re talking about the last 20 years is Warsh is a very unique pick. And, and we’ll get to why. He is completely unlike what we’ve had for the last 20 years, which is very Trumpian, by the way just a very different type of person, thinks about things differently, but most importantly, hypercritical of everything that the Fed has basically done for the last 20 years. 

So, it is going to be important, listeners, as we go through the next 20, 25 minutes, listen in to kind of some of the things that we’re talking about, because I think the landscape is going to change on where we’re going. But let’s talk about why. And I think the interconnectedness, Judson, that you talked about with rates, mortgage rates and inflation, the decisions that the Fed chair makes are perhaps some of the most important decisions for our daily lives, right? 

I think, I mean, you could make an argument that Bernanke, Yellen, and Powell over the last 20 years have actually impacted the daily lives of Americans more than the President of the United States, because the influence that the Federal Reserve chairman has on things like rates and inflation and money printing, that’s actually, Brad, what matters to us as individuals in the United States more than anything. 

Yeah, I don’t even think that’s controversial that the Fed’s more impactful to the average consumer than the president. I wouldn’t even think that’s an argument. I mean, if you look through history, the times that our country has been at its best were when best GDP, highest growth, lowest unemployment, is when we had the strongest middle class. Period. 

And that’s where I think a lot of the tension in our economy’s coming from, is those are the people getting squeezed the most, are the people that are kind of right in the middle, and their bills are going up, but their incomes aren’t going up as much, and they can’t get any assistance. And then you have the rich people on the other spectrum. And so, I think what he does here is going to be really important. 

Yeah. And it’s important because for our listeners, those are your consumers. Absolutely. Right? Yeah. And they’re not only you, but they’re your consumers. Yeah. You’re directly impacted by the decisions that are made by the Fed, but then also, to Judson’s point, you’re indirectly affected as well. 

So okay, let’s talk about this guy. So, he’s the first new Fed chair, folks, in eight years. Jay Powell’s been the most recent appointee in that role. It is a very dicey time right now. We’ve got high rates. We’ve got inflation still above target – above the Fed’s target now for five-plus year. In fact, it printed today. It is stabilizing a little bit over the past few months. It printed today at 3.4, which is at expectation, but again, still above where they want to be. 

And then also, we’ve got political pressure to drop rates coming from the administration. So again, this very potent concoction of rates are high, inflation’s still high, there’s pressure to drop rates. So, it’s a very interesting sort of scenario that sets up for Warsh. Now he was confirmed very narrowly, 54-45 in the Senate, with only one Dem who confirmed, which would be Fetterman. 

So very much party lines here, folks. And at first glance, you might be like, “Oh, that seems normal.” It’s not. Powell’s last two confirmations were 84-13 and 80-19. So, it generally is much more sort of unanimous or super majority. He was very narrow and I think a lot of that, we’re going to talk about why. 

But it is very important to know he is incredibly different than his predecessors, right? Powell was very much more, he’s a former attorney, or he is an attorney, very much more like a continuity of the institution of the Fed guy. Bernanke and Yellen, Brad, as we already talked about, very expansionary. They wanted the Fed to have way more control to do things like quantitative easing, expand the balance sheet, and whatnot. Warsh, on the other hand, again, we’re going to get to this, but very critical of a lot of these. So, he’s very different than these three individuals. 

Absolutely. Yeah. It’s kind of like politics. The pendulum swings way past where you would think you would go. And he’s kind of on that very far end. He hates having the balance sheet as bloated as it is, and he very much wants the Fed to be kind of operating like a ninja instead of being really transparent, so. 

Yeah, no, absolutely. Okay, so before we get to some of his policies, Judson, perhaps we just do a quick bio on who he is so that folks kind of have some lineup on that. 

Okay, so his educational resume looks a lot like mine. He did his undergrad at Stanford and then Harvard Law. He was on the Bush National Economic Council, and he was the youngest Fed governor ever at age 35. Wow. What were you doing at 35? Were you a Fed governor? I was a planner at Cain Watters and Associates. That’s right. Very similar in a lot of ways. Very similar. Yeah. And same with the Stanford and Harvard for you and me. Higher, higher stress, for sure. Yeah. All right. Keep going. 

Yeah, and as we mentioned earlier, he was very much a part of what was going on when we had our great financial crisis. He was in the room for many of the big decisions that happened after Bear Stearns in 2008. Yeah, I mean, I think that’s a lot of the reason why he saw kind of behind the scenes folks and really did not like the direction things were going. So, he left in 2011, just three years after that, totally opposed to the scale of quantitative easing that we were going through as a country and balance sheet expansion as well. 

Just again, the level of debt we were taking on. And Brad, I mean, some of it comes down to what you were talking about. You’re dealing with a crisis. Bernanke did what he felt like he had to do in that moment, but Warsh was incredibly critical in that moment, and then also after, right? I mean, he has been critical of many of the decisions that the Fed has made over the past 20 years. 

He hasn’t changed his tune at all. So that’s probably part of the reason why that was such a narrow choice, is that he’s probably not made a bunch of friends of people that have been there a long time. 

Well, and I think you have folks in the Senate that maybe think that the Fed should have control over this, that they are the experts in this. And so, as a result, the strength that has been created, the expansionary toolkit that they have, the control that they have, is important, and he is very much more like a smaller Fed. And we’re going to talk about how he views things. 

But he even said in his confirmation, Brad, I’m going to use a name that some of the old folks that listen to us are going to know, he said specifically that Greenspan was more of his primary model, right, on how he approaches things. You want to share with our listeners, what does he mean when he says, “Hey, I’m probably more like a Greenspan guy than maybe these other three”? 

Yeah, so that kind of leads me right into the story time I brought today. When would you guys say the dot-com bubble popped? I’d probably say right around 2001. Yeah, it was March of 2000. It actually popped in 1998, and going into the summer, the NASDAQ was up July 15th of 1998. 

The NASDAQ was up 27 28% year to date. By October 7th, it was down 7%. It finished the year up 37%. It was up 49.9% between October 7th and December 31st. One of the biggest rips in market history, and that happened because Greenspan did a surprise cut. So, what we had going on is you had the Asian debt crisis, and then Long-Term Capital Management imploded. 

And the Fed had come out and said, “We have to loosen monetary conditions,” and Greenspan said, “We have two cuts planned, one in August and one in September.” Maybe it was September and November. That’s what it was. So, we’re going to do 25 basis points in September, 25 basis points in November. And then he did a surprise one in October because something over the weekend spooked him that happened to the Asian markets, and he was like, “The dollar’s going to get too strong,” and he kind of freaked out, and he came in and he did an emergency cut. 

If you look at the chart, it’s like it pinballed and never looked back, and that’s why… the dot.com bubble would’ve been a 1998 story if he hadn’t done that. And that’s what Warsh means. If you listen to what he says, he wants the Fed to be more reactionary and not this, like, body that just puts a piece of paper out like we’ve had since Great Financial Crisis and says, “This is what we’re going to do,” right? 

And I think that piece of paper behaviorally has kind of backed the Fed into a corner. They called it the dot plots, and Warsh is getting rid of those. And what the dot plots ostensibly were was every sitting Fed governor put out what their prediction for monetary policy and rates would look like for the next 18 months, and you just always had this piece of paper in front of you. 

Well, behaviorally, if you do that and then something happens, you’re going to go, “But we have this. We told everybody we were going to do this. We can’t do that.” And that’s part of the reason why Powell took so long to kind of combat the inflationary pressures in 2022, is because they didn’t want to look stupid by going back on this piece of paper. If you get rid of that piece of paper altogether, you kind of unleash the Fed a little bit more because you don’t have this anchoring bias that’s embedded there. 

Yeah, and we can talk a little bit more about this, as Brad talks about. But that was a little bit of a shock, a headline this summer when he’s basically, “hey, we’re going to get rid of forward guidance.” Yeah. “We’re going to get rid of these word-intensive statements from the Fed and we’re going to just be a little bit more reactionary,” to your point. And again, right, wrong, or indifferent, we’ll see what happens here, but I think that’s probably the number one takeaway for folks to know this is very different than we’ve had for the last 20 years. 

This is not, “Hey, we’re going to print this very lengthy, wordy Fed print that has the dot plots, that has our guidance and wording, and we’re going to stick to that,” because that gives the market, like, a playbook, right? Yeah. And so it might actually be good broadly for the economy for him not to, but it could also create a little bit of volatility in that we bounce around as a result. 

Yeah. I mean, I generally like that idea as somebody that does what I do all day long, is having a Fed that you know can be more reactionary. I think in the short to intermediate term, the market’s going to hate it. And we’re already seeing that. The term structure of rates is way higher now. 

When he spoke in July, the long end of the curve went nuts. And that’s a direct representative of him not having that piece of paper and the market going, “We don’t know how to price risk right now.” And so it’s going to lead to higher term structure of rates and more volatility to your point, for sure, over the next 6 to 18 months. 

Yeah, because I mean, Judson, what do we always talk about? Market hates uncertainty, right? And now all of a sudden, what they felt like the market feels like is certain is no longer certain because they can’t necessarily predict what the Fed is going to do. 

Well, and a lot of that came from having great uncertainty in the great financial crisis, and they thought, “Okay, well, if we do this, this provides more certainty.” Well, we’ve gotten sort of to the end of this, right? Yeah. We’ve gone through all of this and now we need to react a little bit differently. 

I think it’s interesting when the talk about Warsh was going on and you go back to what you said earlier about how he was marginally confirmed, one of the concerns that you at least heard out there in the media was, “Oh, well, he’s going to be a puppet to Trump and Trump’s just going to cause him to cut rates.” But that’s not really who he is, right? 

No. It’s not. And I think there was some trepidation because they thought that he would turn into that the moment he took office. It’s very clear he’s not going to. We would’ve already had a rate cut probably by now if he was going to do that. So yeah, I think he’s pretty steadfast. 

I mean, Fed Chairmans in general, the ones you can name, it’s generally around something bad happening. It’s a very thankless job. It’s kind of like working with the stock market all day. It’s like if the market’s up and your portfolio’s up, clients are like, “Yeah, it should be,” right? But when it’s down is when they need you. And that’s kind of like what the Fed’s job is. Like, those guys are remembered by making mistakes more often than they are, “Remember how great this guy was?” Like, you never hear that, right? 

Yeah, I think Judson, to your point, which is an excellent one, I think it’s actually a kind of a classic Trump pick, not because he’s going to do what Trump thinks, because this dude is convicted. Like, he, right, wrong, or indifferent, he feels like there is a way he’s going to approach this, and I think what that is, like, “hey, I think what the Fed’s been doing for 20 years is wrong, and we’re going to go this direction instead.” And it might blow up in his face, but at the same time, I think the biggest thing it’s going to cause for all of our listeners, it’s just going to be different. The market’s going to look different, feel different, react maybe a little bit different. 

But let’s talk about some of those ways which we can see. So, let’s talk about inflation, Brad. His signature line, both at confirmation and here more recently is, “Inflation is a choice.” So, he says that high inflation is attributed primarily to financial excess, monetary accommodation more so than, like, tight labor markets or demand or whatever else it is. 

The point I think here is that inflation still is one of the core mandates of the Fed, but he views it very differently than Powell maybe, who was like, “Hey, it’s actually just when the labor market’s tight or demand’s overheating, that’s what forces it,” whereas he says, “No, it’s actually maybe a little bit different than that.” 

But at the end of the day, he still has his inflation mandate, and that’s going to be the sole focus. That plus unemployment’s going to be the sole focus, right? Yeah. 

The unemployment’s still in a good spot. So, that’s where I think he’s going to be hyper-focused on that inflation piece as long as the unemployment piece kind of stays range-bound. The problem with him right now, it’s not, like, the forward guidance is one thing, and I think a lot of people treat that like- We need the Fed to hold our hand, we’re investing our money and all this stuff. And, like, you can get rid of that. The reaction function of how he’s going to combat this is kind of what’s missing, and I think it’ll be a mistake by him to go a couple more meetings without doing something that’s going to tip their hand about how… 

Like, we don’t know if is he going to combat inflation by shrinking the balance sheet? Is he going to tighten rates up? Is he going to do some sort of other QE-like thing to combat this? Like, we don’t know, and the longer that goes on, the more the long end of the curve is going to kind of force the Fed’s hand. 

The long end of the curve is begging for a rate hike right now. It’s like, we need it, do it. And to Hunter’s point, when he’s saying inflation is a choice, it kind of is, because in the ’80s, they have the playbook on how to get rid of inflation. Paul Volcker showed them. It sucks. It’s very, very ugly. It’s very ugly. Ask your parents if you don’t know.  

Yeah, all our parents have stories about that. My dad’s first mortgage was, like, 19% or something. Like, it is not fun. They could do it today, and we would all be screaming and yelling and madder than a hornet. But he’s right. It is a choice. Like, you could take that inflation down to zero pretty quick but at the expense of our economy for a few years. 

Yeah, and I think you lean into the second place that he differs dramatically, which again, I mean, you said it. It’s all about the balance sheet in his eyes, right? Yeah. He really wants… he feels like a large balance sheet, meaning a ton of debt, is a bad thing. He wants to get there, get to a smaller one because he feels like he can then lower rates as a result. So again, very different than post-GFC where they were expansionary. And so, I think those, to me, those are the two big things. 

Well, and I guess perhaps the third would be that he feels like the Fed’s job is not to be, like, the overlord of things, right? He wants to also kind of shrink the Fed’s responsibility and toolkit. Yeah. 

He actually wants to have less Fed meetings. Like, he has said, “I want to meet, like, two times a year.” And he did this at one of his other stops. He brought their number of times they got together down. He doesn’t want the Fed involved unless they actually have to be. And the problem with that balance sheet thing, to his point, is it kind of distorts price discovery. Like, if you have the Fed that’s buying all the Treasuries on issuance, like, what’s the real Treasury rate? 

We know it shouldn’t have been near zero like it was, but what would have been the terminal rate then? Well, who knows? Because the Fed bought everything. So, you have a captive buyer of it, and so how can the Fed’s policy be effective if you don’t even know what the rate of interest should be at any given moment because you’ve got the Fed buying all the paper? 

So, I think a lot of those things he’s doing are good. The market’s again, just not going to react kindly to it because the Fed’s been kind of like a drug dealer, and we’re all addicted to them since 2008. And now he’s kind of taking the goods away, and we have to go through some I think for a little bit. 

For compliance purposes, do we need to have something about drugs? We’re not supportive of drugs. Probably. Yeah. Yeah, it’s always a good thing. I mean, Judson, you actually already went down this. Let’s just talk about what he’s done so far, right? I mean, again, it’s maybe different than the headlines would have said, “Oh, he’s just going to cut rates immediately.” 

That hasn’t happened. In fact, right now, he has not said anything, but right now there are priced-in rate hikes. Yeah. Right? So that could be coming, Brad. But he’s eliminated forward guidance or dramatically stripped down forward guidance, which you mentioned. He’s stripped down the statements that are being made in the Fed. So, I mean, it’s already a different landscape over the first three months or so. Yeah. 

Yeah, there’s been a lot of handwringing over his press conference, but again, I think it’s just people were used to being spoon-fed. And Powell’s press conferences, you couldn’t even sit through them. They were so dry and boring. 

And he said the same thing. And to your point earlier about, like, the statements they put out, like CNBC would be like, “They changed a word,” you know? And everybody would be like, “What’s this mean when they change the word?” And, like, that kind of stuff is going to stop. That’s very, very clear. 

But I, again, he’s going to have to, in the September meeting, like if he comes out and gives a statement like that again, we’re going to see the market react maybe even more violently this time. He’s going to have to do something that’s going to kind of at least steer the ship in the right direction of like, this is where we’re probably going to go, and I think everything can kind of react like that. 

I mean, the market, since we’ve had the Fed, the stock market has been down the following six months after you’ve installed a new Fed chairman every single time. It has never been up. On average, it’s down 15% over the six months after. So that would be between now and November. If it were to hold, we would be down a lot between now and then. 

Now, the average is kind of unfair because you have the Great Depression in there, and then poor Greenspan took office, and you had the ’87 crash like immediately. So, if you look at the median, it’s down 10%, which is probably more fair. Now, after that six-month period, the market’s always up higher by quite a bit, on average 12%. So, the market not liking a new Fed chair is not germane to Kevin Warsh. Like, they always hate it, so we should be fair to him, I think, a little bit. 

Yeah. Well, and I want to come over to you in a second on what Tectonic’s view is on both the markets and then also rates. But before I do that, Judson, I think it’d be important to just sort of tie a bow on some of this. 

Like, the things that are ahead of Warsh, right? I mean, so, what does inflation look like, I think is a big one. Does it get back down to their targets, in the low to mid twos? Does unemployment also hold? I think that’s a big one. Can he do something with the balance sheet? 

But perhaps the biggest one, and this is the one that I think, I mean, he can’t control, but we’ve said on this podcast time and time again that the number one disinflationary thing that we’re facing as an economy, and again, disinflationary means slowing inflation, but it’s still there. It’s not deflation. 

The number one disinflationary thing for our economy right now is AI. It’s AI, it’s technology and can that development that’s going on right now behind the scenes in the economy… and again, we’re going to go through data centers and all that this fall, but Judson, I think that’s the biggest thing. Can that create lower inflation rates? And if so, that changes Warsh’s next four years in a big way. 

Well, yeah. Looking forward, and that’s what it comes down to, is looking forward with all of this investment, with all of the growth and what AI and technology is doing in our economy, how much more productive does that make our economy just by the result of that very investment, right? By that very growth of that technology.  

If that can be disinflationary, then like you said, maybe this, yes we’re still not that far above, in theory the goal of what the Fed stated its inflation rate to be, but it has gone in the opposite direction a little bit over the past few months, which I think is one of the reasons why, in going back to our first top five, bottom five, talking about birds, which is why I think that Warsh has been a little bit more hawkish since he’s come in, is because of what we’re facing. If things reverse a little bit, that could change very quickly based on what we’re talking about. 

Yeah. I appreciate… Sorry, Brad, before you come to you. I appreciate, like that is the Fed’s job. It’s not to put forward guidance in a dot plot that says, “Here’s where we’re going.” 

It, in my opinion, it is to say, “This is what the economy is telling us, and this is how we’re going to respond.” And if the economy tells us, hey, as an aside, listeners, if you’re like, okay, disinflationary technology, Brad, you just took your daughter, your oldest, to college. Congratulations, by the way. 

Thank you. Freshman year. Yeah. Boomer. I just took Ronnie back to school for his sophomore year, and we moved him into his first apartment, and I’m hanging his television on his wall, and it’s this, like, unbelievable Samsung 4K smart TV that we bought for $150 at Best Buy, and he’s like, “Did you have one of these when you moved in?” 

And I’m like, “No, we had this-” They were $10,000 at the time. And they would crush you if you dropped it too. Yeah. I mean, we moved that, this big ass box TV up three flights of stairs into our first apartment, and that’s like a small little example of what we’re talking about when we say disinflationary. 

And if you think about the last 25 years from when we were in college to now where our kids are, it’s been an unbelievable economy, right? And so there are so many great things that could come from this, but he has to be able to see what’s coming and respond accordingly, and I think that’s going to be the biggest thing he has over the next four years. 

Yeah, I mean, AI on its face is the most deflationary technology that’s ever been created, right? Like, it should do nothing but suck cost out of a system. And so that’s going to throw wrinkles both good and bad into the economy. You have the apocalyptic one when it’s like robots do our jobs and, like, what are we going to do? 

And then you have the utopic version of, oh yeah, coffee at Starbucks is going to be a nickel, and everybody’s going to be rich, like Elon talks about. And the truth’s probably going to be somewhere in the middle. Like, we’re probably not going to have either one of those. But yeah, the Fed’s going to have to deal with that and not make critical errors and be able to pivot because it’s going to be a way more dynamic economy than… 

I mean, just think about part of the reason why the last 20 years have been so good is because of the internet. Right? And the internet changed everything. I mean, think about our jobs when we were first out of college and I had to set up our email server at my old firm because nobody knew how to do it. And now, I mean, think about how much business we do just over email, right? And, and AI’s going to be like that on steroids. 

Yeah. It’s going to be an interesting next four years, which is why we wanted to bring it to you guys and get a little bit of understanding of who this person is and what’s facing his team at the Fed. 

Before we hang up, story time though, Brad would love to come to you as we head into the end of the year. You already cheated a little bit and said, “Hey, here’s what is typical of the Fed,” over the next six months or so, or I guess we’ll have about three or four months now. But what’s Tectonic’s sort of longer-term outlook, maybe in the next 12 months, both… let’s do both on rates and then also on the equity markets at large. 

Yeah, I think on rates I’ve kind of dropped our idea of a rate cut in the next six to eight months. I don’t think we’re going to get one. So, I’ve taken that completely off the table. If you look at betting markets, they’ve pretty much done the same. Or prediction markets, I should say. Compliance. 

You brought drugs and gambling. Yeah. Way to go. Yeah, let’s see what else I can jam in here. So, no rate cuts. No, I would think we’ll probably get a rate hike somewhere between now and the end of the year. 

We’ll get one, whether it’s September or December. I think the Fed- he’s going to feel like he has to do that. And I don’t think a lot of the damage that’s been done with Iran and energy prices has filtered its way all the way through the system yet, and that’s going to kind of keep that upward pressure on inflation. I don’t think it’s going to spike like really badly. 

But I think having a quarter point rate hike, the markets have already… The bond market’s already priced that in, guys. So, if he does that, it’s not like the bond market’s going to puke the next day. It’s already in the T-bills and everything else. It’s already… They’ve priced in two of them. 

So, he can probably feel like he can do that without a lot of repercussions at this point. So, I think we’ll get a rate hike. The equity market won’t like that. It’ll probably yawn at it. If we get two, the equity market really won’t like it. I think the fall’s going to be super bumpy, we’re near all-time highs. 

The reason I say that is individual stock volatility is higher than the actual VIX. So that doesn’t happen very often. Normally, the overall broader market’s volatility kind of matches the underlying single security volatility. The single security volatility is off the charts. 

I think the last time I was on here we were talking about IBM had like a 1987 day. It was down 20% in a day. You don’t see that a lot, and that’s what the market’s telling you. It’s skittish, and any time you get near all-time highs, the market typically is. 

A pullback here, people listening, would be very, very healthy. Markets that go straight up tend to come straight down when bad things happen. The healthiest markets of all time have been markets that go up 5%, back off 2%, go up another 5%, back off 3%, and they back and fill the whole way up, and it doesn’t create these big air pockets underneath the market. That’s kind of where we are now. 

So the market’s kind of, I think, path of least resistance right now is just down a little bit, nothing bad. And I think that’s what we’re going to deal with onto the fall and into Christmas. And if we do get a rate hike, I think the market will be able to start processing Warsh and then pricing things better. 

The other thing he’s dealing with right now is everybody’s read about all the circular financing with AI. The bond market’s starting to reject a little bit of that. Credit default swaps on Oracle and these big hyperscalers that have borrowed all this money or have all these pending obligations have blown out, which means that the market’s saying, “Hey, I don’t know if these are going to be viable debts to be able to be floated.” 

And so, if he keeps raising rates and then they’re still trying to push all this debt in there, it could slow that AI train down for a little while. So that’s going to be a very delicate balance. So, I think he’s going to have to walk rates up a little bit and then stop. If you wait too long and inflation pushes higher, then you’re going to be talking about cranking them real higher, and then we’re probably talking about a recession. So, I think he’ll be able to skirt that. 

But I do think it seems like August and September are always bad months for the market anyway, so I don’t think I’m saying anything new. Maybe it’s just because it’s so hot here that it just affects my mood. But I think bumpy August, September, and then maybe get a rate hike at that September meeting, and then the market will smooth out for the rest of the year. I do think we’ll be higher, particularly after the midterms. This time next year, I think the market will be higher than it is today. 

So, I think that was a fantastic summary. I think that, again, we want you, listeners, to understand these things because of what we talked about early in the podcast is that it affects you so much and it affects your customers so very much. 

And if you’re still with us and you’re still listening, that probably means you like some of our commentary on the economy and on the market. And you guys just dropped last week your first new newsletter with Tectonic. You want to talk a little bit about what that is? 

Yeah, for sure. It went out to all clients, so you should have it in your inbox. We would recommend you read it. It’s got just a quick little letter from me on thoughts on the market, but then more importantly, some great info from the Tectonic team, both a manager interview with one of our small cap managers, as well as the nerdiest, geekiest market analysis you’ve ever seen. 

So, if you want to just deep dive all this, you absolutely should. And I think really both that letter as well as the last couple minutes of Brad. Judson, if you were voting on who should be Fed chair between me and Brad, who would you choose? I’m going to say Brad. Okay. Yeah. He gets my vote. Please don’t do that to me. And would become confirmed. 

We’re going to do a quick vote in the room. Everybody that votes for Brad, raise your hand. Oh, God. Even producer Erin voted for Brad. You are the new Fed chair of the Accumulating Wealth podcast. Okay. But I think it’s awesome. Our job, guys, is to bring information to you guys and keep you up to date with everything that’s going on as best as we can, and this is a good one. This is a good one. Thank you, Brad. Absolutely. Anytime. Indeed. Thanks, Brad. 

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