Market Could Take a Dive if Renewed Pressure Leads to Jerome Powell Replacement
The Federal Reserve chair is facing some headwinds that could see him resign.
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On a very positive note, my theory that the administration will start focusing on "national production for national security" got a major shot in the arm with the Department of Defense Investment in MP Materials Corp.
It also served as a reminder that while the sovereign wealth fund hasn’t been garnering much attention lately, it could play a major role in any efforts to grow (and benefit from) these industries.
Investors should own stocks that will benefit from this shift: commodity=related stocks, infrastructure stocks, biotech stocks, etc. (chips possibly too, but they have run a lot already).
Tariffs May Be More Real than Market Is Pricing
I think President Trump “pivoted” away from tariffs rather than “chickened” out. The strategy was not working at the time (the markets were in disarray). He also had few if any “wins” at the time. Now he has the attack on Iran, NATO mostly agreeing to 5% defense spending growth and getting the "big, beautiful bill" passed. He has always believed in tariffs, and may well be encouraged, or emboldened, to take another swing.
While it is tempting to ignore this all as bluster, investors should start reducing positions in areas most affected by tariffs. You have some time, because even if the August 1 tariffs get implemented, there will be “hope” that Trump quickly backtracks. It is not unreasonable to assume that all of the latest tariff chatter is just “negotiating,” but at the highs, it is prudent to take them more seriously than that.
Earnings
I am mostly focused on how our “global” companies are doing. I think we have a decent sense of the state of the U.S. economy (a bit slow, but nothing major, with some real strength in AI). We don’t seem to have a good sense of what is going on in the rest of the world.
Are consumers still consuming across the globe? Are they consuming as many U.S. products as they were before Liberation Day?
To me, that is what I’m mainly looking for.
I'm also curious to hear how companies are finding tariffs. My best guess is that most will give some version of “manageable” at current levels, but higher levels and ongoing uncertainty will be bad.
Hints of inflation or margin shrinkage will also be watched closely.
I’m not expecting any big surprises, but will be looking for “tells” on what to expect in Q3.
Jerome Powell
Federal Reserve chair Jerome Powell is under renewed pressure to resign, and maybe facing new strategies to be “fired."
While I don’t agree with Powell on many things (I think we should be cutting interest rates in July and on pace for three to four cuts this year), I don’t think he should be forced out. It sets a bad precedent. Given the wealth he created for himself before joining the Fed, he has the wherewithal to withstand a lot of pressure.
If he was going to be replaced, the market reaction would be dependent on a few things:
- How radical his replacement seems. Someone out of left field, acting as a “puppet,” would be bad for markets, but a realistic replacement could be OK
- If there is a massive shakeup in the overall board, then that would be concerning. There are checks and balances on the Fed chair, so something indicating that they are trying remove those would be more problematic than just naming a new chair.
If something happens, the front end of the yield curve will go lower (the market will have to price in cuts, sooner than later). The back end could be “quirky.” It could go higher, on the presumption that the U.S. will not care about inflation and lose control of the back end, but I would buy that dip in bonds (if it happens) as things like “yield curve control” might be brought up.
There are a bunch of things to watch and lean into (or out of) as the stories develop.
