Powell
Hints, Wall Street Sprints
By Victor Sperandeo with the
Curmudgeon
Fed Chair Hints at Rate Cut:
The big story of the week was Fed Chairman
Jerome Powell’s speech at the annual Jackson Hole, Wyoming central bankers
conference, sponsored by the Kansas City Fed. For the first time this year, Powell
hinted at reducing the Fed Funds Rate at the September 17th FOMC
meeting. The equity markets celebrated yet again with a strong rally, as
they’ve done repeatedly whenever the probability of a Fed rate cut
seemed to increase. However, that didn’t happen this past Friday.
At Friday’s close, the CME
Fed Watch Tool forecasts an 84.7% probability of a 25 bps rate cut at the
September FOMC meeting vs. an 85.4% probability one week earlier on August 15th. Yet stocks rallied strongly after
Powell’s comments on Friday, with the Russell 2000 up ~4% and other indexed up
~2%! What gives?
-->The Curmudgeon wonders
how many times the SAME financial event forecast (already discounted) can be
celebrated by the U.S. equity market?
Markets and Assets at or
Near All-Time Highs:
Is a rate cut really needed
when so many markets and assets are at or near all-time highs?
Here are a few examples: U.S.
equities (DJI, S&P 500 and Nasdaq 100), residential real estate, Bitcoin, Gold,
Silver (highest price since April 2011), rare paintings, pink (rare Argyle) diamonds,
U.S. farmland and forest land, etc. In addition, money supply (M2), margin
debt, credit card debt, U.S. federal debt, annual deficits, and real GDP have
never been higher. Take a look at this chart, showing
all-time high stock market valuations based on S&P 500 price-to-book value:
Fed’s Independence
Threatened by Trump:
In addition to persistent,
non-stop badgering of Powell, it appears that U.S. President Trump will gain
control of the majority of the FOMC! He
says he will fire Federal Reserve Governor Lisa Cook, if she does not
resign. Cook is alleged to have committed mortgage fraud and is being
investigated by the U.S. Justice Department.
Economists and political analysts
have overwhelmingly criticized Trump's threat to fire Cook, highlighting the
irony of Trump, a convicted fraudster, accusing her of mortgage fraud without
substantial evidence. Legally, Trump
can’t fire Cook without just cause. She was confirmed by the Senate in 2022 and
is serving a term that lasts through 2038. If Cook leaves the Fed, Trump will
have a new choice for her seat on the FOMC.
On August 7, 2025, Trump named
Stephen Miran as his nominee to succeed Adriana Kugler as a member of the
Federal Reserve Board of Governors. Miran would occupy the seat through
Kugler's remaining term, set to expire in January 2026.
Currently, Trump has the votes of
two of his previous Fed appointees: Chris Waller and Michelle Bowman. And Trump will designate a replacement for
Powell when his term expires on May 15, 2026. Thereby, five of seven FOMC MEMBERS will have
been appointed by Trump. With five rotating Federal Reserve Bank Presidents,
that will give Trump virtual control of the Fed in May of next year.
Victor’s Outlook on Rates,
Bonds, and Economy:
My guess is that Fed Funds are
headed to 1.0% to 1.5% in 2026. The long end of the yield curve is a different issue
due to massive deficits and debt resulting in an oversupply of Treasuries to be
auctioned. Long bond rates will only
decline materially if the U.S. is in a recession or if the Fed adopts “yield
curve control,” as it did at the end of World War II.
As readers know, I suggested
buying 5-year T-Notes in this July 7th Curmudgeon post and
it’s worked out very well so far. I plan
to sell them after the September FOMC meeting. Then, buy them back on any
decline.
It’s time to cover all shorts on
long-term U.S. bonds (if you have them) as the economy will slow down markedly.
Contrary to most analysts, the economy is a function of money supply and global
liquidity rather than interest rates (which only affect marginal borrowers). Michael Howell of CrossBorder Capital Ltd. is the best at measuring
global liquidity.
Analyst - Tariffs Will
Reduce Corporate Earnings:
Stephanie Pomboy,
CEO of Macro Mavens,
makes a critical point about Trumps’ tariffs. After an importer pays a tariff
at the border, the corporations that buy the goods often mark up the price to
cover the added cost. The real question is whether the consumer can afford to
pay this "Trump tariff tax.” Pomboy doesn't
believe so, a view that is shared by many economists. The logic is that if
corporations could already get away with charging higher prices, they would
have done so already. Therefore, to maintain market share, corporations will
likely absorb the bulk of the tariff cost. As a result, corporate
earnings will decline, which could lead to a drop in stock values and
negatively impact on the broader economy.
This suggests that tariffs
primarily tax U.S. businesses and consumers, not foreign entities, as the cost
is typically passed down the domestic supply chain. However, the situation is
complex. With significant government deficit spending, predicting market
movements—such as attempting to "short" stocks—is difficult because
the spending can temporarily mask the negative economic effects of the tariffs.
Legality of Trump’s
Tariffs?
On May 29, 2025, U.S. District of
Columbia (Washington D.C.) Judge Rudolph Contreras issued a preliminary
injunction, finding that tariffs imposed by Trump under the International
Emergency Economic Powers Act (IEEPA) were unlawful. He ruled that IEEPA
does not authorize such sweeping tariffs, noting that in its over five-decade
history, no president had ever used IEEPA to impose tariffs until President
Trump.
The Trump administration appealed
that decision to the U.S. Court of Appeals for the D.C. Circuit, and the
injunction was temporarily stayed, meaning the tariffs remain in effect while
the appeal is underway.
Victor believes the U.S. Appeals
Court will block Trump’s emergency tariff powers, which will only create more
chaos. A Supreme Court appeal would take time, leaving businesses paralyzed and
uncertain about the rules.
Trump Administration and
"Corporatism":
"Corporatism" is a form of fascism. It is a partnership
between government and corporations where the state is the senior, dominating
partner that controls and directs economic activity to serve the national
interest.
On Friday, U.S. Commerce Secretary
Howard Lutnick said that the U.S. government has taken a 10% stake in embattled
chip maker Intel, the Trump administration’s latest effort to exert control
over corporate America. That’s straight out of Benito Mussolini’s fascist
playbook, but it is not permitted by the U.S. Constitution!
Article One Section 8 of the Constitution enumerates the specific
powers granted to Congress, not the Executive branch. The Constitution
and the principle of separation of powers prevent the Executive branch from
directing government funds without legislative approval. Yet Trump has
repeatedly violated that section! Where
is the outrage?
For one, Larry
Kudlow, formerly Economic Council Director under Trump’s first term is ”very,
very uncomfortable” with the government owning part of Intel. Economist Steve Moore, who Trump
nominated to be a FOMC member (but he withdrew), also criticized the
administration’s decision, calling it “terrible.”
“I hate corporate welfare. That is
privatization in reverse. We want the government to divest of
assets, not buy assets. So terrible, one of the bad ideas that’s come out of
this White House,” Moore told Kudlow during an interview.
Allowing the U.S. government to
own 10% of Intel is unconstitutional—a 100% step toward fascism. While Victor
doubts Trump realizes this idea traces back to Mussolini, it is shocking how
ignorant this U.S. President has been.
The long-term consequences are very dangerous - this “corporatism”
policy would create a monopoly for Intel, since government contracts would be
awarded without competitive bidding. That would eventually allow Intel to drive
competitors out of business, leaving consumers to pay whatever prices Intel
demands. This is yet another step toward the collapse of free markets.
Even after Trump leaves office,
other “dictator-like” U.S. Presidents could follow his lead and buy stakes in
companies they wish to control. Trump seems determined to dismantle our already
fragile capitalist system in new ways every day. More in Victor’s Conclusions below.
Victor’s Conclusions:
Eventually, Trump angers all of his followers, by breaking the U.S. Constitutional,
and civil laws. Trump has no ethical code to guide his actions, no
understanding of economics, or the Laws of our political system. Meanwhile he
thinks he is “Moses!” Where is Congress or the Democratic party’s challenge
to Trump’s domination of every aspect of government? The end is occurring before their eyes and no one seems to care!
-->Gold, T-bills, and 5-year
T-Notes may be the safest havens—along with a lot of prayers.
End Note - Trump vs. PT
Barnum:
As a student of history, Victor
has been thinking of who President Donald Trump most reminds him of. Without a doubt it is Phineas
Taylor (PT) Barnum (July 5, 1810 – April 7, 1891), who co-founded the
Ringling Bros. and Barnum & Bailey Circus. Barnum was an American showman,
businessman, and politician remembered for promoting celebrated hoaxes who said
of himself, "I am a showman by profession ... and all the gilding shall
make nothing else of me." According
to PT Barnum's critics, his personal aim was "to put money in his own
coffers." The adage "there's a sucker born every minute" has
frequently been attributed to him, although no evidence exists that he had
coined the phrase.
Wishing you good health,
success and good luck. Till next time……
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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