Is The Fed Panic Already Fading? | Weekly Roundup

The hosts argue that peak inflation and peak growth for the year are being traversed without collapsing into recession, supported by a waning fiscal impulse in the second half. The Fed is described as scarred from calling inflation transitory and unwilling to acknowledge that the oil price move has proven to be exactly that. The floor on inflation appears to be around 3 percent, with a return to 2 percent unlikely given government deficits running at 5 to 6 percent of GDP. The prediction is a hawkish hold for the remainder of the year, with one host noting that if the Fed skips July, falling inflation will prevent any action before the election.

Kevin Warsh is believed to want a hawkish hold rather than an actual hike, and despite stating he did not want to give forward guidance, he implicitly provided it by setting the stage for inaction. Warsh mentioned balance sheet policy rejiggering approximately five times in a speech, and the hosts argue balance sheet policy is more impactful than front-end rate policy because the yield curve is historically suppressed at the long end. Warsh gave credence to the committee's hawkish dot plot without personally endorsing it, characterized as a strategic move to maintain standing within the committee. The Powell Fed is described as having made a hawkish pivot mistake three times in a row, including in 2024 and 2025.

Gasoline prices have not followed crude oil prices lower because finished product reserves were depleted and refinery capacity utilization has been maxing out, with crack spreads measuring the gap between gasoline prices and crude input costs. Once past the summer peak driving season that gap is expected to close, though possibly not completely. Lower gas prices provide stimulus to consumer spending elsewhere, reinforcing core inflation trends, and core PCE was still running hot despite headline oil-driven disinflation.

Micron earnings showed memory prices surging due to AI buildout, and Apple raised prices approximately 20 percent on RAM-dependent products. The hosts argue this has minimal impact on overall personal spending compared to healthcare costs rising approximately 15 percent per year, and the trim mean inflation methodology is described as more useful for monetary policy because memory represents a tiny basket of average monthly consumer spending. Hiking rates to address memory price inflation is characterized as archaic because higher rates in a heavily indebted economy primarily deliver more income to money market fund holders.

The DRAM ETF and Mag Seven stocks were positively correlated until the first week of June, after which the correlation flipped negative, with Google's announcement of an 80 billion dollar equity issuance identified as the apparent catalyst. The hyperscaler complex is being rerated lower on a multiple basis as these companies transition from cash-flow-rich, buyback-heavy profiles to leveraged balance sheets with reduced free cash flow. Stopping AI spending causes them to fall behind while their models lose share to free Chinese and open source alternatives, making upside on these stocks very capped for the foreseeable future. Mag Seven represent approximately 40 percent of the S&P 500, and the hosts predict their sustained drift lower will eventually matter for overall market health, with one characterizing the pattern as a long-term topping distribution characteristic of a 20-year cycle.

Implied correlation is currently around 10, near lows, compared to 40 during prior selloffs, indicating a rotational market rather than a crash scenario. Industrials and banks are making new highs while high-flying and meme sectors are being sold hard, with CTA and systematic algo switches driving rapid sectoral rotation in real time. The biggest loser in current conditions is described as passive management and closet indexers who were forced to buy Mag Seven in huge size as those stocks became larger portions of overall index weight. The Brian Reynolds credit cycle framework holds that debt gets oversupplied into a single sector until it collapses, with housing in 2008 and commodities in 2015 as prior examples, and the current AI sector is described as exhibiting the same dynamic with greater systemic significance given the Mag Seven's index weight.

High yield credit spreads are near their lows and SpaceX bonds targeting 30 billion dollars were oversubscribed with 90 billion dollars in demand, reinforcing the view that current conditions represent rotation rather than a broad crisis. Secular inflation is described as the mechanism by which the economy grows out of its debt burden, and figures including Warsh, Bessent, and Trump are said to understand that nominal growth out of debt requires running inflation alongside growth. The run-hot trade and secular inflation narrative is predicted to attract hot money flows next after being rinsed by what are described as fake hawk narratives. Bitcoin's inflation-hedge narrative is said to have weakened because secular inflation is now channeling capital into productive sectors, with the Micron and Bitcoin chart relationship described as completely inverse, suggesting capital rotates between productive and store-of-value assets.