Kevin Warsh’s No-Win Bind

Kevin Warsh’s No-Win Bind

Kevin Warsh might rue the day he put himself in contention for the job of Federal Reserve chair.

He won Senate confirmation yesterday, 54-45. The only Democrat to vote yea was Pennsylvania’s John Fetterman.

Mainstream media coverage focused on the narrow vote, in contrast to years gone by when Jerome Powell and Janet Yellen commanded more bipartisan support. Yesterday’s vote “reflected how tensions with the White House have dragged the Fed deeper into the political fray,” as The Wall Street Journal sees it.

That’s not even half the story: “Warsh is stepping directly into one of the most dangerous policy environments in decades,” says Paradigm macro maven Jim Rickards.

As you know, Donald Trump wants the Fed to lower short-term interest rates. Presumably Warsh wants to accommodate the president’s wishes — in contrast with Fed hawks who want to leave rates alone or even raise them.

Unfortunately for Warsh, the most recent inflation and job numbers “give the Fed’s hawkish wing exactly what it wants,” Jim tells us.

As mentioned here on Tuesday, the official inflation rate has sailed up to a three-year high of 3.8%. And the headline number for new jobs during April was a healthy 115,000.

From the standpoint of conventional monetary policy there’s no reason to cut rates at the next Fed meeting a month from now.

And even if Warsh wants to cut, he’s one of only 12 members of the Fed’s Open Market Committee; he has to persuade at least six other members to see things his way.

“The hawks will argue the labor market remains resilient,” Jim says. “They’ll say inflation risks tied to war-driven energy prices are still elevated. They’ll warn that cutting rates prematurely could ignite another inflation wave.”

“That leaves Warsh trapped between economics and politics before he even settles into the chairman’s office,” Jim goes on.

“If he pushes aggressively for cuts, critics will immediately accuse him of doing the White House’s bidding. Every move will be scrutinized through the lens of political influence. Once markets believe monetary policy is being dictated politically rather than economically, trust erodes quickly.

“But Warsh faces the opposite danger as well,” Jim goes on.

“If he moves too cautiously… if he delays cuts and sounds overly concerned about inflation… he risks disappointing the very political coalition that helped elevate him to the position in the first place.

“That creates a no-win scenario.”

Especially in light of the fact that “Warsh isn’t inheriting a normal inflation cycle. He’s inheriting stagflation risk,” says Jim.

It’s that awful 1970s combination of economic stagnation and inflation at the same time. Inflation is roaring again this year — and the job market isn’t nearly as healthy as the headline numbers suggest. For instance, temporary employment is weakening; when businesses need to cut payroll, temps are usually the first to go.

Warsh now owns “a policy trap unlike anything we’ve seen in decades,” Jim concludes.

“Markets initially may celebrate his arrival. Wall Street generally likes the idea of lower rates. Risk assets tend to rally whenever investors believe monetary easing is coming.

“But markets may be underestimating how difficult it will be for Warsh to actually deliver those cuts.”

Bottom line: “This isn’t simply a personnel change at the central bank. It’s the beginning of a political, economic and monetary collision that could shape markets for years to come.”

And we’ll aim to keep you ahead of the curve.

Markets Today: Bad Signs, Good Signs

While the U.S. stock market is at all-time highs, something disturbing is happening beneath the surface.

One day recently, the S&P 500 set a record close. But at the same time, less than 60% of the index’s 500 component stocks exceeded their 50-day and 200-day moving averages.

“It has happened only a handful times in the past,” says Paradigm trading pro Enrique Abeyta — “all of them between Dec. 21, 1998, and March 22, 2000, the end of the internet bubble.”

No, that’s not a sell-everything signal. Because on the other hand, last week the S&P notched a weekly close above its upper Bollinger Band for the first time in over a year.

“The Bollinger Band,” Enrique tells us, “is a technical signal measuring distance from moving averages.”

What just happened has happened only a few times before — and 100% of the time the S&P was higher both nine months later and one year later.

Put it all together and Enrique says we have a valuable signal for market timing — “good/great for the next year but then watch out below!”

Speaking of good/great, the S&P just surpassed the 7,500 mark for the first time — up over three-quarters of a percent on the day.

The Nasdaq’s gain is even stronger, now just 25 points away from 26,700. And for once, the Dow is more or less keeping pace — back over 50,000 for the first time since February.

Paradigm readers have racked up a slew of winners over the last 24 hours…

• Enrique’s Breaking Profits readers have collected 300% on Credo Technology — one of his first recommendations when this entry-level newsletter was launched last year

• PRO-level readers of Rickards’ Strategic Intelligence bagged 63% gains on a long-term holding in Seabridge Gold

• Chris Cimorelli’s 10X Trade Club readers bagged a fast 291% playing Apple call options and another 284% with calls on a Chinese internet ETF

• On the bearish side, Rickards’ Crisis Trader readers collected 336% in less than a month playing put options on Tractor Supply.

The big economic number today is retail sales — up 0.5% from March to April, on par with Wall Street’s expectations. Of course, that’s skewed by rising gasoline prices; back those out and the jump is a more modest 0.3%. Which is even more disappointing when you realize these numbers are not adjusted for inflation.

Meanwhile, not much news we can see yet from the Trump-Xi meeting in Beijing — other than Xi making clear that the issue of Taiwan could bring the two superpowers into conflict. (Three years ago your editor made the case that there’s nothing about Taiwan worth risking American blood and treasure over.)

Treasury yields are backing down but the 10-year note is still over 4.45% and the 30-year bond remains above 5%.

In the commodity complex, U.S. oil futures are down slightly but still over $100. Gold is back below $4,700 and silver is off over two bucks to $85.14.

Bitcoin is rallying, just shy of $81,000 again while Ethereum sits at $2,284.

FDA Follies

In Washington, FDA commissioner Marty Makary just got the heave-ho — for the wrong reasons, in the eyes of our biotech expert Ray Blanco.

Makary resigned under pressure yesterday — “pushed out over his decisions regarding vapes and abortion pills,” says Ray.

And not for rejecting a string of promising drugs that would have helped desperate and dying patients.

“That tells you what the political priority structure is,” Ray tells us. “But the FDA has always been a mess.

“In 1992, FDA Commissioner David Kessler said the quiet part out loud: ‘If members of our society were empowered to make their own decisions… then the whole rationale for the FDA would cease to exist.’

“We had the man running the agency, on the record, stating that the entire institution depends on patients not being allowed to choose.

“That principle is why a dying cancer patient can't access a therapy that might save them. It's also why a healthy adult couldn't decline a vaccine they had questions about during COVID. It’s the same architecture.

“A 2018 analysis in Cancer Medicine, authored by oncologists at the University of Ottawa, MD Anderson, and UCSD, calculated what FDA delays actually cost. The finding: One life-year is lost in North America for every 2.2 minutes of approval delay. Worldwide, one life-year every 12 seconds.

“Makary made things worse because he doubled down on denying lifesaving therapies.”

Alas, Makary’s departure doesn’t change what Ray calls “the fundamental anti-freedom-to-choose architecture that is the FDA’s reason to exist.

“Moreover the denial machine he created remains in place” — led, Ray says, by Katherine Szarama, a Makary pick still serving as acting director of the FDA’s Center for Biologics Evaluation and Research.

“She wrote the policy that produced the recent gene and cancer therapy rejections before she joined the agency.

“I predict biotech will rally when she’s replaced.”

Stay tuned…

Comic Relief, Pulse of the Nation Edition

We present the following both for its entertainment value — and as a revealing window into attitudes and resentments here in these United States…

Mailbag: AI Regulation (and More)

“The idea of the Federal Death Authority (FDA) being in charge of AI is a joke. Right?” a reader writes after Tuesday’s edition.

[To be clear, the Trump administration is talking about FDA regulation as a model for AI regulation. Which is just as concerning. But go on…]

“I remember the story published after the death of FDA regulator John Nestor, and his habit of getting on the Washington beltway and immediately moving to the left-most lane while slowing his car down to 55 because ‘that's the speed limit.’ Also the fact that his reign of uselessness was marked by not approving any new drugs.

“That's exactly what's needed for great innovations!”

“Regarding AI, believing restraint in a capitalist model is a part of the equation is laughable to me,” counters another reader — “not to mention (fill in your favorite foreign adversary) will stop at nothing to shove their AI advances up America’s ass. Our adversaries’ advances in AI scare me more than the monsters shepherding AI in the U.S.

“Each day I look forward to The 5. I don’t necessarily agree with all you share, but it always gives me a lot to think about and I always believe you try to deliver objective perspective. Thank you.”

The discussion of AI regulation Tuesday prompted our final correspondent to say that “Dave, your skepticism about Trump has been validated.

“His idiotic Iran war seems to have completely changed his America First trajectory. It has also started making him afraid of the bogeyman. He ‘lost’ the 2020 election in large part because he did not follow his instinct relative to COVID and shutdowns. He got fooled into getting into this war by those that were good at playing on his hubris. Now we are stuck, and our kids will be in the crosshairs if Trump can't get comfortable taking an L here.

“But he's now second-guessing himself on other things, like AI, and stopped thinking in terms of USA first. He's now in this ‘make the world a better’ place, which is where every stupid president has been politically, except maybe Reagan. And look how America has suffered.

“Trump is turning out to be a RINO, as they all end up being, save for a few, e.g., Massie. So discouraging.

“If even our greatest hopes turn out to be like Trump is turning out to be, there is no hope. I believe we will be a full communist state within 10 years. Between the libertarians that do nothing except root for the unobtainable, the RINOs that all perform the role of fisherman, i.e., giving a little line here and there to reel in the conservative fish, and fascist leftists, we are doomed.”

Dave responds: And people call me cynical!

As long as you brought it up… the special interests’ long knives are out for Thomas Massie, with his primary election in Kentucky’s Fourth Congressional district next Tuesday.

“Don’t believe the BS last-minute accusations and betting market shifts,” says the comedian and podcaster Dave Smith. “These are obvious signs of a concerted effort.”

“Our country hangs in the balance,” adds Clint Russell of the Liberty Lockdown podcast. “Thomas Massie may be our last line of peaceful defense.”

I’d like to think Russell is engaged in hyperbole here — but I fear he might be on to something.