A look through prior Middle East wars suggests a potential conflict with Iran would likely be a volatile "sell the news" event. Prior conflicts most directly impacted the U.S. economy through higher oil prices and increased economic uncertainty. Fed policy focused on the growth negative impact and viewed the inflationary impulse as transitory. Risk markets reacted negatively to the buildup of the war, rallied at the outbreak and continued to rally under the impression of […]
The market is significantly underpricing rate cuts as the rapid improvement of AI tools suggests a rising unemployment rate and continued disruption in the financial markets. AI tools are increasingly able to automate a range of tasks, so there will be a structural reduction in demand for certain workers. Lower employment reduces aggregate demand until the displaced workers are able to transition to other fields. AI tools also disrupt incumbent businesses, who tend to be […]
Japan's enormous foreign investment holdings put it in a position to both run loose fiscal policy and manage its currency depreciation risk. Prime Minister Takaichi's victory on Sunday gives her the opportunity to implement an expansionary fiscal plan that should super charge its equity markets and further accelerate Yen depreciation. The BOJ appears committed to dovish policy with real rates still negative despite above target inflation. Japan's reluctance to hike rates and desire to maintain […]
Warsh's quest to shrink the Fed's balance sheet implies fundamental changes in the banking system, money markets, and Treasury issuance. He would be restarting QT even through the Fed just began expanding its balance sheet to address pressures in funding market. Treasury can lean on heavier bill issuance to moderate the market impact, but they will require the cooperation of private banks to ease the funding market impact. Banks would need to increase their own […]
Reider's jump to front runner in the Fed chair race is surprising, but his long held views show that he is the candidate most suited to a fiscal dominant world. Reider has a long career in asset management and is political outsider without obvious ties to Trump. He makes the standard arguments for rate cuts to 3% by highlighting weakness in labor market and increases in productivity, but has thoughtful views on the role of […]
The President is poised to announce his pick for Fed Chairman as soon as this week and Kevin Warsh is now the leading contender. Warsh is a former Fed governor and noted hawk, but his views on Fed policy align with that of Secretary Bessent. Warsh is most notable for his long time quest to shrink the Fed's balance sheet. His argument for more rate cuts rests on an AI productivity boom, and the tightening […]
