The GOAT's Last Stand

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Later today, Jerome Powell delivers his final FOMC rate announcement as Fed Chair. We'll get to the man and his legacy in a minute. But first, we need to talk about why cutting rates here is one of the most irresponsible moves the Fed could make.

Why? One word.

Inflation.

If you still think inflation is low and was put to bed for the cycle, you're being misled or have no idea what you’re talking about. Plain and simple.

Here's the truth as the data tells it.

PPI for March came in at 4.0%. That's what businesses are paying. When that number runs hot, it works its way down the line to you.

CPI for March was 3.3%. Keep in mind that this print was distorted by a 0% rental inflation reading during the government shutdown. Meaning the number has been erroneously low since November’s reading. The problem there is that the manipulation of October’s data begins to catch up and show higher CPI rates beginning in about April’s data, which will print next month. Unfortunately for the Trump Administration, those higher prints are going to be hitting right when higher inflation from oil and gas prices caused by the war with Iran are taking hold as well.

Truly impressive stuff from the administration here in all the wrong ways.

PCE, the Fed's preferred metric, drops tomorrow morning. February print was 2.8%, and that was before the Iran war. You’re going to see another 3-handle on this one too for March, like PPI and CPI.

Now, I can already hear it: "But it was worse under Biden." Sure thing. At some point in the future we'll get to why that was, what actually drove it, and why repeating that line tells anyone who understands the economy and how to read it, that you don’t.

Again, for new subscribers and those who choose to live life with orange tinted glasses, I voted for Trump… three times. I'm not a Biden fan, and I sure as shit am no fan of Kamala. What I am is a hell of a lot more interested in the truth rather than defending some political narrative. A narrative that, quite frankly, I'll have to mindlessly walk back and take the opposite view of in a few years anyway to stay in lockstep with a political party that tells me how to think. You know, like the vast majority of the country over the past 5-10 years.

If political loyalty is your thing, no problem. Enjoy getting consistently fucked by markets and losing all credibility with people who actually have deeply researched values rather than being spoon fed them at home, school, peer group, or by group of politicians who don’t give a rats ass about you.

But, whatever. Here's what matters most: inflation has been trending higher since it bottomed last April. You know, right when the new tariff rates were announced and began taking effect.

Folks somehow whiffed on this one badly last year. Crazily enough, some are still whiffing on it despite all of the evidence to the contrary. (Maybe huffing is the right word for it at this point.)

It’s not that difficult of a concept. Add a cost to a product, and the price goes up as long as consumers can keep paying those higher prices. That continues until the higher prices finally kills demand, at which point economic activity drops and the economy contracts.

But I digress.

Bond yields are telling the same story as inflation. When inflation runs hot, US Treasury yields move higher. Why? Because high inflation says a country doesn't have control of its currency and/or it’s economy. That makes it a less reliable borrower. And less reliable borrowers have to offer more return to keep the money flowing in.

And right now? Yields look like they're about to scream higher. Pretty much exactly what you'd expect when inflation has been above target and continuing to climb higher for a year straight.

When you anchor the 2-year Treasury Yield to the Fed Funds rate, you see the 2-year beginning to move higher than the Fed Fund rate. Significant as the Fed Fund Rate is short-term lending and tends to track the 2-year. You do not want to see the 2-year begin to rapidly outpace the Fed Fund Rate as we did when inflation began to surge in 2021 and early 2022, because that is a recipe for higher inflation which becomes increasingly more difficult to control.

Only this time it would be far worse, because in 2021 and 2022 we were not coming from an environment where prices had already gone up 25%+ in the previous five years as we are now.

That doesn't mean the Fed should hike tomorrow. You want to see this move follow through before hiking, which would also mean admitting last year's politically-driven rate cuts were a mistake.

But you sure as shit don't cut with inflation running nearly double the target and trending higher.

On Warsh's preferred metric: Another Example of the Administration Talking Out of Both Sides of Their Mouth

Incoming Fed Chair Kevin Warsh said in his confirmation hearing that he prefers Median Consumer PCE to dictate rates. The problem? It looks as though it’s a lagging indicator compared to PCE, CPI, and PPI.

It's also built on Core PCE, which strips out food and energy. It seems like nothing more than a political angle as it's friendlier to the Trump administration's preferred narrative, but it doesn't tell the whole story. Doubly weird because the Trump administration spent last year complaining that the government’s data wasn't timely enough, only to have Warsh turn around and pick the more lagging metric. Which by the way, he has no history of mentioning before his confirmation hearing. Making his claim suspect AF.

What About Unemployment

Keep in mind that the Fed operates under a dual mandate:

1. Maximize employment

2. Keep prices stable

We’ve covered inflation. Now, let’s move to the labor side.

Unemployment is sitting at 4.3%.

Historically speaking? Pretty good.

More importantly, the 4-week moving average of continued unemployment claims has been trending down since late last year.

With a few monthly exceptions, companies haven’t begun to aggressively cut staff yet over the past 18 months.

While at the same time, job gains have been pretty anemic the past two years.

And that's how you get a "No Hire. No Fire." economy. Which is exactly where we are right now.

The Verdict: The Fed Does Not Cut Now

Inflation is well above target and trending higher. Unemployment isn't trending higher at the moment.

You do NOT cut rates here.

Especially with bond yields sitting on a powder keg, waiting for the next hot inflation print, or the next domestic or geopolitical misstep to send institutional investors fleeing the US or waiting for a higher rate of return.

Markets are great that way. They're a built-in safeguard when leadership thinks it can do no wrong.

So, Where's the Opportunity?

Agriculture. Why? Because food inflation tends to follow higher oil and gas prices, and those charts are curling back up.

You can see it in the price of $WEAT ( ▲ 4.26% ) …

…and Soybeans.

A few ways you can play this are:

$MOO ( ▼ 0.11% ) (Ag ETF)

$NTR ( ▲ 0.75% ) : Nutrien

$CF ( ▼ 1.07% ) : CF Industries

$BG ( ▲ 1.87% ) : Bunge

$GRO ( ▼ 8.16% ) : Brazil Potash Corp. (If you’re comfortable with higher risk and into more speculative plays.)

Powell's Final Act

It's the end of what's been a truly historic run for Jerome Powell as Fed Chair. Hard to name another central banker who has navigated more adversity at the helm of the world's most important central bank.

He dealt with:

• A president who doesn't understand there are times for restraint, inflation, or the need to keep inflation under control

• A world-stopping pandemic response which contributed more to inflation in 2021 and 2022 than most realize

• Multiple wars driving up food and energy prices

• Personal and professional attacks from a president and people who do not understand how the economy functions, and how it needs to be managed differently during each phase of the credit cycle

• And climate protestors crashing his press conferences, earning his now-famous "Just close the fucking door" response (Ok, that wasn’t a tough one for him. But it was great to see and became iconic.)

Powell has also had to weather a clearly political and moronic DOJ investigation driven by Trump's frustration over not getting the lower rates he wants. Honestly, if you think cost overruns on the renovation of an 89-year-old, 276,000-square-foot building (the first major renovation in its entire existence, on a budget set nearly a decade ago before the inflation surge, with additional asbestos discoveries mid-construction) shouldn't be expected to run high… I've got a bridge to sell you. You'd also think a guy who's spent his life building and remodeling large buildings would understand that. Unless this was just another tactic to attempt to bully and demean a more intelligent and knowledgeable person to get his way. Which is especially rich when you remember Trump bankrupted himself in the early '90s on… cost overruns… on a large casino project where the odds are literally heavily in your favor.

Has Powell had missteps? Absolutely. Show me someone with eight years in the same job who claims they haven’t, and I'll show you a liar or someone with no self-awareness.

Powell whiffed on calling inflation "transitory" in 2021. But once he saw that he was clearly wrong, he acknowledged it and then responded aggressively with one of the most assertive hiking cycles in modern history. If only more leaders in DC could acknowledge a mistake that fast and pivot, the ride would be a hell of a lot smoother for the rest of us.

His other big miss? Caving to political pressure with last year's rate cuts.

But overall, a remarkable tenure that stretches well beyond what any normal eight-year stint would test in a Fed Chair.

Want to debate it? Be my guest. I'll bring the data and the historical context. You bring whatever political or economic extremist opinion is making the rounds. They’re as flimsy as a beer-soaked napkin when you actually take the time to research the claims for longer than five minutes.

Ultimately, J-Pow crushed it as a Fed Chair, and then showed he had the cajones to stand up to a wannabe bully with way too much power when pressed.

That’s as American as it gets, which is why Powell =🐐

What else would you expect from one of the top finance minds in the country who also happens to be a Deadhead? That's exactly the kind of dichotomy that should run the Fed.

Warsh has big shoes to fill. So far, he’s leaving a lot to be desired.

Hope I'm wrong. Time will tell.

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