Welcome Kevin Warsh
As HAI mentioned last week, this author and his family are in the middle of a move. So far, so good on that front, but time continues to be very tight. As a result, this week, HAI will be limited to welcoming Kevin Warsh to his new position as Federal Reserve Chairman.
HAI hopes Warsh’s first day was nice because, in HAI‘s view, the following months and years likely won’t be. That’s because the walls are closing in on the Fed. Now (in an increasingly unhealthy system), either rate hikes or rate cuts can be expected to spike bond yields on the long end of the curve and likely trigger a debt crisis across Western sovereigns.
In early 2022, now former-Fed Chair Powell was facing rising inflation while simultaneously dealing with a U.S. government debt and fiscal situation that required negative real rates to be sustainable.
Powell responded to that inflation episode by saying “damn the debt problem” and hiking rates aggressively in a Volker-esque campaign to crush inflation. In so doing, Powell sent long-term U.S. Treasury yields sharply higher and greatly exacerbated the U.S. debt and deficit problem.
In August of 2024, Fed Chair Powell was facing a combination of still-above-target inflation, rising oil prices, rising U.S. Treasury yields, increasing bond market volatility, and a U.S. government debt and fiscal situation that required negative real rates to be sustainable.
This time, Powell responded with seeming deference to the debt problem, despite inflation. Powell cut rates by 50 basis points on September 18, 2024 to lower yields and ease U.S. Treasury market stress and reduce U.S. fiscal strains. The results of the rate cuts, however, mirrored the impacts of 2022 rate hikes. Ten-year U.S. Treasury yields rose 70 basis points over the next nine weeks.
Incoming Fed Chair Warsh is now facing this same lose/lose policy dilemma, but the situation is now coming to a head. Warsh faces rising inflation along with a U.S. debt and fiscal situation that requires negative real rates to be sustainable. Either hiking rates or cutting them is likely to send long-term U.S. Treasury yields higher, and therefore deepen the fiscal crisis/bond market crisis.
In other words, in HAI‘s view, it seems increasingly likely that Kevin Warsh will effectively oversee the first post-inflation-control mandate Fed era. Warsh is likely to be forced to serve the Fed’s unofficial third mandate—keep the insolvent U.S. government funded. That means the days of a Federal Reserve standing between U.S. citizens and inflation appear numbered.
That also means that a new era of renewed appreciation for precious metals as the premier global store of value are also upon us.
Weekly performance: The S&P 500 was up 0.88%. Gold was down 0.86%, silver lost 0.35%, platinum was down 3.01%, and palladium was off by 4.91%. The HUI gold miners index was off 2.58%. The IFRA iShares US Infrastructure ETF was up 0.58%. Energy commodities were volatile and lower on the week. WTI crude oil was off 7.92%, while natural gas was down 1.32%. The CRB Commodity Index was off by 1.66%. Copper was up 1.47%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 2.95%. The Vanguard Utilities ETF was up 3.30%. The dollar index was nearly flat, up 0.04% to close the week at 99.32. The yield on the 10-yr U.S. Treasury was off 3 bps on the week, closing at 4.56%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
