Hawkish Kevin Warsh transcript

Hey everyone, and thanks for jumping back into the macroverse. Today, we're going to talk about the most recent speech given by Kevin Warsh at Jackson Hole. If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and check out the sale on intothecryptoverse premium at intothecryptoverse.com. As a reminder, the prices for tickets uh for the first ITC conference taking place November 21st, those prices are going to be going up uh in just a few days on September 1st, so make sure you get your ticket before then if you would like to go.

Link is in the description below or the pinned comment. So, I know, like me, many of you dreamed of analyzing the the the the chair of the Federal Reserve speech is that Jackson Hole when you were a little kid, right? We all dreamed of it and and here we are. Uh but it it it it's not that surprising, right? I mean, he he essentially came out and you know, he was quite hawkish, talked about how inflation is not really giving him the reads that would make him think like they have it under control, and I believe he said something to the effect of he would you know, he'd be hard-pressed to to say that monetary policy is restrictive right now.

Like it's not is is what he was saying. And and so, because of that, it it certainly it certainly led to at least in the short term of repricing of you know, potential interest rates and like what those probabilities are. So, we'll talk about that in a little bit. But, I I do want to say one other thing before we get into the interest rate stuff, and that is like we keep looking at interest rates and and we talk a lot about interest rates, but and whether they're going to hike, whether they're going to whether they're going to cut.

Um but, there's another tool that the Fed has, and obviously it was a main theme of the last cycle, and I'm sure many of you remember it, probably not so fondly, and that is quantitative tightening, or QT. I think a lot of people just kind of assume that QE has to come back. Right? Like it it just has to come back in the short term because that's what they do. But given the technological boom of artificial intelligence and AI, and if we are to believe that the AI um bull market continues into into the next year, which I I think it will, even with a correction in the back half of the midterm year, if you are to believe that, and one of the reasons I believe that is just simply nothing more than I don't believe the market will top before you get all these major IPOs out of the way.

And I mean Anthropic's is probably coming up in the next month or two, but OpenAI's is probably not until 2027. So, if you believe in that, that that that will continue, then the argument is that could they actually start quantitative tightening once again? So, I think, you know, if you look at Warsh's history, he's already he's known to to want to reduce the balance sheet of the Fed, right? Like that is one of the things he's been known for wanting to do in the past.

And he also does not view quantitative tightening necessarily as a substitute for interest rates. Um I I think that, you know, some people think like, "Oh, if if we just do aggressive QT, then we don't actually have to raise these rates." Now, it is true that you could have a situation where if they were to go through QT, it might eventually lead to outcomes where interest rates don't necessarily have to be as high, but I also think in the short term, Warsh basically did what he had to do.

Because if you think back to um the last FOMC meeting, or maybe it wasn't the FOMC, know, it was some other speech that he gave. But if you listen back to some of his prior speeches, one of the things that he said was that they were going to rely on the long end of the yield curve to to do the work for them rather than necessarily raising rates, right? Right rather than changing the short end of the yield curve, um they would rely on the long end of the yield curve.

But, something major happened between when he said that and today. And that is that the Treasury Secretary, Yellen, you know, they they definitely accelerated their bond buyback program. So, and and and the point of that, the point of what the Treasury Secretary is trying to do is they're trying to bring down the long end of the yield curve at the same time that the chair of the Federal Reserve is saying, "No, we need to rely on the long end of the yield curve." So, how can both be true?

How can you rely on the long end of the yield curve like, you know, one branch or, you know, one institution but then the other institution comes in and says, "No, we're going to we're going to purposely try to keep long end rates down." Now, the problem with the bond buyback program is that it doesn't necessarily solve any of the issues that led to inflation in the first place. It doesn't solve any of them. In fact, you could argue it it's actually inflationary.

And so, what you might see is you might see the market test the Fed's resolve or or the the the Treasury Secretary's resolve because when when governments intervene in in markets like that, right? When they start intervening, the market has a habit of like testing their resolve constantly and and sort of forcing their hand to see, "All right, you'll do that? Well, how far will you go to defend the long end of the yield curve?" So, I I I just want to put this, you know, this like nugget in your brain.

And that is QT might be announced in the coming months. I I don't think it's going to be announced in in September. Like I don't think it's going to start in September. I don't really think it would start in October. And I could be wrong, but the earliest I could see quantitative tightening being announced would be December of 2026 because that would be 1 year after when they suspended it. And I I I think if they're going to raise rates, they might not want to announce both at the same time.

All right, like I don't know that they're going to say, "All right, we're going to raise rates and also we're going to start QT." They might try to stagger that. A more realistic time frame on when QT could start back up would be early 2027. That's probably the base case, but I think there is a case to be made that it actually could start as as soon as December, at least an announcement of it as soon as December. Now, listen, if they do that, that doesn't mean like that's the nail in the coffin for a potential Bitcoin bull market, right?

What it means is that the next bull market in crypto might be similar to the last one where Bitcoin does well and it lifts some of the altcoins up, but the majority of the altcoin market just collectively bleeds back to Bitcoin, right? Like there's a case to be made that we just get another one of those. Just because and and it could be a scenario where the next 4-year cycle for Bitcoin, the first part of the cycle is during QT, but maybe the latter part of the cycle is during QE.

That's actually what happened in 2019, right? Like the first part of the cycle was during quantitative tightening and, you know, they went a little too far, maybe not, but I mean the pandemic happened, and then they had to pivot over to QE. So, I I just want you to think about that kind of like in the back of your mind that something similar could happen again. It's possible that they could announce quantitative tightening, and and if they do, um, you know, it it could have a similar effect on markets that it had last cycle.

Just kind of running the same playbook once again. And a lot of people learned their lesson last cycle as to what that means for higher risk assets. And so, I I wouldn't be surprised if if that is the outcome where you get a rate hike. At some point, they actually start quantitative tightening back up. Not because we're, you know, in a bear market, right? But because the AI trade is still going on and and this is their way to try to tame inflation.

Because the one thing Kevin Warsh does not want to do is allow inflation to run rampant. He's already been very critical of you know, the prior Fed chair in in some ways. And basically just saying, "Look, we just allowed inflation to run above target for the last 5 years." I don't think he's super excited about the idea of inflation just coming right back because then he's essentially doing what he's criticizing his predecessors of doing.

So, I don't know if he'll be successful, but I do think that is is something to consider as to how this may in fact play out. So, what I want to do as well is I want to look here at um uh let me see if I can share the screen. So, I want to look here at our rates. So, this is what expectations for rate hikes were looking like before Jackson Hole, right? So, before the meeting uh there was a about a 2/3 chance that they would keep rates steady in September.

And about a 1/3 chance that they would that they would actually uh raise rates. But now, you can see that the probabilities have kind of flipped where there's almost a 2/3 chance of a rate hike and only a 1/3 chance that they keep rates constant. Now, there are some more things that will happen between now and then that will affect these probabilities. For instance, we will have another labor market report next week.

We'll have, you know, another inflation print in mid-September as well. So, this is by no means like locked in here. It It could certainly change. But, this is a consideration here, right? Cuz the market right now thinks there's actually going to be two rate hikes um this year. Or at least leaning towards two rate hikes this year. And then I wonder if 2027 uh they might start quantitative tightening back up to try and help reduce inflation.

And and you know, and and then they they probably wouldn't continue to raise rates. I'm not convinced yet that they're going to raise to to 4.25. I I think raising to four is might be enough to kind of you know, kind of steady the ship a little bit. That doesn't mean like I I they can't raise, but I I I'd be surprised if they if they didn't at least consider that a little bit more. And then in the mid-90s, they actually cut rates.

And and then they reignited the animal spirits. And and then what happened is they ended up raising rates 25 basis points. And then they just left it. They left it at 25 basis point rate hike uh for like the next year or something. And then eventually they had to raise rates again. That eventually killed the uh the dot-com bubble. But, that process was like a 3-year process. So, you know what I mean? It took place over a really, really long period of time.

So, right now it it looks like the Fed, according to the markets, is more so leaning in the direction of a rate hike. Um but, again, there's still plenty of time to go between now and then. So, in terms of the thesis that that you know, that I've talked about on this channel and and what I think's it's to happen, remember, the stock market will often have corrections in the back half of midterm years, and often times the correction in the stock market will start in either August or September.

Now, in two of those years, in 2018 and 2014, when the stock market started correcting in September, it wasn't really obvious that we were in a correction until October. So, there's no guarantee that we're going to get into September and be like, "Oh, yeah, like this this is what's happening." In in a couple of those cases, it wasn't really even obvious that this is what was happening in in until until September. And you can actually look at it, right?

If we if I show you the S&P 500 in 2014, you can see that it it topped the week of September 15th, right? And and, you know, we didn't get this big red candle down until about early to mid-October. And then if you look at at 2018, you can see that the market found a top the week of September 17th, but it was still basically almost at new highs even the week of October 1st, right? It wasn't until the second week of October where it was more clear that we were in fact getting a correction.

Now, in 2022, the correction started, you know, shortly before the the meeting at Jackson Hole. I remember vividly this was the week of August 15th is when we found the local top, and then shortly after Powell came out and gave his speech at Jackson Hole, and I still remember it, as I'm sure many of you guys do as well, where he basically said, "There will be pain." And he said that, and then the market then proceeded to sell off into the month of October.

So, you know, it's hard to say, right? Like exactly where there might be a local top if this plays out, like whether it could be August, whether it could be September, but if if you needed a narrative for what would justify a 10 to 20% drop, you know, a late-cycle rate hike might be just enough to do it. In fact, again, as I was talking about earlier, if you look at at interest rates in in the '90s, right? So, if we if we zoom all the way back over here, I thought I added it, but maybe I need to add it again.

All right, if you look at at rates, uh I'm not ha- I'm not getting it to load here. So, let me go over here. All right, so we're going to go to the S&P, and then we're going to add interest rates. So, if you look at interest rates in the '90s, let me uh flip this over to a new scale. Imagine for a moment that I actually edited my videos, and you guys didn't have to watch me do this. Like imagine. We will never know though.

All right, we'll never know what that's like. Um so, i- if you look in uh the '90s, you zoom all the way back, you can see that they they had gone through this rate hiking cycle, and then they cut rates, kind of like they have in this cycle, and then they ended up raising rates again, right? In in March of 1997. And when they raised rates in March of '97, the stock market actually started correcting in February, right?

It started correcting the month before they raised rates. And back then, it dropped about 10%, right? So, you got a on approximately 10% drop in stocks with the rate hike. Probably people thought it was over, right? Because it probably felt like at the time that that was the worst thing in the world to have another rate hike after cutting rates from, you know, 6% down to down to 5.25, and then they raised rates back up to 5 and 1/2.

And then they kept them there from March of '97 through August of '98. So, a year and a half, rates stayed constant. Then they lowered rates in a correction, and then they ended up having to raise rates again, and then finally the dot-com bubble burst. So, it it took a long time, right? It took a very long time for that to play out. So, what I'm saying is if they were to raise rates in September or at some point, you know, maybe that is what you need to to justify just that brief correction in the stock market, kind of reset sentiment in the crypto space in the in the fourth quarter of the midterm year, how it normally plays out, and and then things just kind of carry on like they always have.

And then, yeah, maybe at some point in the next couple of years, uh things could change, but again, that could still be a ways out, right? Like I don't, you know, it could still be another year or two away before we're that phase of of the business cycle. But, those are my thoughts. Hopefully, you guys have found this stuff useful. If you guys like the content, make sure you subscribe, give the video a thumbs up. Remember to check out uh the ITC conference.

It's coming up uh in November, but if you get if you want to get your ticket before prices go up, make sure you do so uh before September 1st. Thank you guys for tuning in, and I'll see you next time. Bye.