This Is What The Fed Will Do If A Court Rules That Lisa Cook Committed Mortgage Fraud

Key Concepts:

• Lisa Cook lawsuit against Trump, potential impact on Federal Reserve independence
• Nvidia's Q2 earnings miss, bullish Q3 guidance, implied volatility
• Core PCE data, inflation trends, Federal Reserve policy, wage growth

1. Lisa Cook Lawsuit and Federal Reserve Independence

• Lisa Cook is counter-suing President Trump on a personal basis and wants to remain on the Federal Reserve during the appeals process.
• The Federal Reserve will defer to the courts' decision: if Cook is found to have acted illegally regarding her secondary mortgage, she will be advised to leave the board; otherwise, she will remain.
• The first legal hearing is scheduled for tomorrow.
• Key Argument: If Trump succeeds in removing Cook, it could set a precedent for future lawsuits against Federal Reserve members who disagree with the president, potentially undermining the Fed's independence. "If you chase someone with the police car down a highway, eventually they will slip and you can pull them over."
• This precedent could be used by future presidents as well.

2. Nvidia's Earnings Report

• Nvidia missed revenue expectations for Q2, primarily due to lower-than-expected revenue from China.
• However, Nvidia provided bullish guidance for Q3, which was unexpected.
• The stock initially fell 5% but recovered to be down only about 1% since the earnings release.
• Implied Volatility: Investment banks like Goldman Sachs and Morgan Stanley estimated a potential 10% move in Nvidia's stock based on the earnings report. The actual move of only 1% suggests the misses were minor relative to expectations.
• Without the bullish guidance, the market would have reacted negatively to the missed earnings and lost China revenue.
• Nvidia needs to meet its guidance in future quarters to maintain Wall Street's confidence. Failure to do so could result in lower stock prices and multiples.

3. Inflation and PCE Data

• Tomorrow's PCE (Personal Consumption Expenditure) data is coming out.
• The core PCE data is more important because the Federal Reserve uses it to determine interest rate policy.
• Alarming Trend: Core PCE is trending upwards, with an estimated increase to 2.9% from 2.8% the previous month.
• While a 0.1% increase may seem small, consistent increases can lead to significant inflation (4-5%).
• Cutting interest rates would likely add "fuel to the fire" and exacerbate inflation.
• Inflationary Factors: Tariffs, tax cuts, large budget deficits, and potential rate cuts are all contributing to inflationary pressures.
• Reduced immigration and a shrinking workforce could lead to higher wage demands, which can also be inflationary.
• Wage Growth: Real wage growth (wage growth exceeding inflation) is good. Nominal wage growth (wage growth without considering inflation) is bad if it's below the pace of inflation, as it cuts into profits and doesn't provide consumers with enough spending power.

4. Conclusion

• The episode highlights three key areas: the legal battle surrounding Lisa Cook and its implications for the Federal Reserve, Nvidia's earnings and future prospects, and the concerning trend of rising core PCE inflation.
• August is historically a tough month for equities, and the podcast will continue to track these developments closely.