Trump JUST Chose VIOLENCE | The Fed Choice (Kevin Warsh)

Kevin Walsh as Fed Chair: Potential Impacts on Markets & Economy

Key Concepts:

• Quantitative Easing (QE): A monetary policy where a central bank purchases government bonds or other assets to increase the money supply and lower interest rates.
• Basis Points: A unit of measurement used in finance to describe the percentage change in an interest rate or yield. 100 basis points equals 1%.
• Inflation Hawk: An individual who prioritizes controlling inflation, often advocating for higher interest rates.
• Dovish: An individual who favors lower interest rates and a more accommodative monetary policy to stimulate economic growth.
• Deflation: A decrease in the general price level of goods and services.
• Fiat Currency: Currency declared by a government to be legal tender, but not backed by a physical commodity.
• Deleveraging: Reducing debt levels.

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I. Background & Trump’s Choice

Donald Trump has nominated Kevin Walsh as the next Federal Reserve chairperson, pending Senate confirmation. The speaker emphasizes a fact-based analysis, dismissing political polarization surrounding the nomination. Trump initially considered Walsh in 2017 but ultimately chose Jerome Powell, believing Powell would continue the “easy money” policies of Janet Yellen – policies characterized by low interest rates and quantitative easing. This decision proved inaccurate, as Powell subsequently raised rates by over 100 basis points (1%) in 2018, prompting criticism from Trump.

The speaker highlights that Trump bypassed Walsh in 2017 partly due to Walsh’s 2011 resignation from the Federal Reserve in protest against easy money policies, fearing they would devalue the dollar. Ironically, the dollar appreciated by 66% from the time of Walsh’s concerns through Trump’s inauguration, despite the subsequent period of significant money printing. While the dollar has recently experienced a 9% decline, it has remained comparatively strong against other fiat currencies. Treasury Secretary Steve Mnuchin reportedly believed Walsh would be “too disruptive” to the financial system. Walsh was the youngest ever Federal Reserve Board of Governors at age 35.

II. Walsh’s Historical Stance & Concerns

The speaker details Walsh’s consistent focus on inflation, even during periods when it wasn’t a significant threat. He was described by colleagues as “allergic to data” and fixated on imaginary inflation problems. Specific examples include:

• 2006: Expressing concern over core inflation at 2.1%.
• 2007-2008: Maintaining inflation fears even as Bear Stearns collapsed and the economy entered a recession. He argued inflation risks remained high the day after the Bear Stearns collapse.
• Post-Great Recession (2009): Predicting continued inflation while the US experienced significant deflation (57% deflation seven months after the recession).
• 2017: Warning of high inflation when it was at 1.7%.

This track record led to Walsh being labeled as consistently “wrong about the dollar” and “wrong about inflation.”

III. The Shift & Potential Motivations

The speaker questions Walsh’s recent shift towards a more dovish stance, suggesting it may be politically motivated to secure a position under a potential second Trump administration. He contrasts Walsh’s past hawkishness with his current advocacy for rate cuts, framing it as a departure from his established principles. The speaker contrasts Walsh with economists like Chris Waller, who are described as “technocrats” who respond to economic data.

IV. Potential Market Impacts: Winners & Losers

The speaker outlines potential market consequences of a Walsh-led Federal Reserve:

• Bonds: Walsh’s likely preference for tighter monetary policy and reduced money printing could make bonds a more attractive “safe haven” asset, potentially driving down long-term bond yields.
• Cash: In a deflationary environment, holding cash would be advantageous.
• Stocks & Crypto (Leveraged Positions): A deflationary environment could trigger deleveraging in stocks and crypto, as debt becomes more expensive. The speaker notes that the current economic system is reliant on inflation to make debt more manageable.
• Gold & Silver: If bonds regain their safe haven status, it could signal a peak in gold and silver prices.

The speaker acknowledges that a Walsh-led Fed could prolong economic hardship during a recession, aligning with the views of free-market absolutists like Peter Schiff who advocate for minimal government intervention. However, he also suggests that a controlled reduction in money printing could ultimately lead to a healthier economic expansion.

V. Deflationary Scenarios & Risks

The speaker differentiates between different types of deflation:

• Beneficial Deflation: Occurs during an economic expansion with responsible balance sheet management and limited money printing.
• Harmful Deflation: Can accompany job losses (like the Great Depression) or falling wages that outpace price declines (like Japan in the 1990s).

VI. Concluding Remarks

The speaker expresses skepticism about Walsh’s credibility, given his past policy errors. He emphasizes that Senate confirmation is still required and that the market may not react dramatically in the short term. He promotes his “alpha report” and related services (mekevin.com and houseack.com) as resources for navigating potential market changes. He concludes by reiterating his belief that Walsh is unlikely to significantly alter his core beliefs and will likely pursue a less stimulative monetary policy.

“Central bankers are supposed to be independent and they're supposed to respond to data and not what the president wants.” – Attributed to the general expectation of central bank behavior.

“Treasury Secretary Steve Minutian is believed to have argued that Kevin Worsh would be quote too disruptive for the financial system.” – Direct quote regarding Mnuchin’s concerns about Walsh’s potential impact.

“He feared that core inflation at 2.1% in 2006 was the major issue that the Federal Reserve needed to fight.” – Example of Walsh’s focus on inflation even when it wasn’t a major concern.

“He was wrong on inflation. He was wrong on the dollar.” – Summary of Walsh’s past policy miscalculations.