Fed Scared of Inflation Resurgence | Jack Farley & Max Wiethe
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

Hello, everyone, and welcome to a special edition of Monetary Matters. I'm excited to hand over the host chair back to Jack Farley. He is back from his vacation in Greece, and we're going to kick things off with the Fed Day episode. So, Jack, what did you think of today's press conference and the SEP and the lack of really any move from the Fed?

It's great to be back here, Max. The market was pricing in. It was a virtual certainty that the Fed wouldn't cut today. It's a special Fed meeting. We get eight a year, but only four of the year we get, as you said, the SEP summary of economic projections, which says what the Fed thinks about the economy, but also those dreaded or yearn for dots. The

The summary of economic projections showed inflation expectations going up for the Federal Reserve, which I noted was the third Fed meeting in a row that they've happened. And it's the same for core inflation and the second meeting in a row where real GDP expectations for this year went down. At the same time, interest rate expectations were...

went up marginally. As Nick Timorosa from the Wall Street Journal noted, there was some rearranging of the dots. So if you look, I think, at the mean average, which is not reported, it would be lower just by looking at the dots. But the way the Federal Reserve reports them, median central tendency and range, it actually looks like it was unchanged, but marginally more hawkish on the dots. So Max, if you put those three ingredients into a cocktail of

lower GDP expectations, higher inflation expectations, and more hawkish, that to me would not be particularly good for the economy or risk assets. But the market is taking it in stride. And it just goes to show that

It's not 2022 anymore. The market cares about many other things other than the Federal Reserve. I think that Chair Powell and many of the other speakers have done a very good job of hammering home the

in periods of uncertainty, which we have just an extra flavor of uncertainty now. Previously, it was just what's going on with tariffs. Now we have a war popping up in the Middle East, which could affect oil prices, many other things. But predominantly, I think people, as it relates to Fed policy, are focused on what could happen to oil prices and thus inflation that they are going to wait and see and wait for the data to come through. Now, we did get some data in this past week. We got sort of

a weak CPI print. Obviously, they use PCE, so it's a different indicator, but the market still is keenly focused on that. Did it surprise you at all that they revised inflation expectations up despite what have been pretty consistently cool inflation numbers?

I didn't really have expectations. So there were no expectations that they could be surprised to the upside or downside. I think that actually, Max, what you said about wait and see mode, that has been accurate for the Federal Reserve for a very long time. But, you know, waiting for the data, we're going to wait for inflation to fall before we actually start cutting rates. That's been what they've been saying for many months now.

But actually, inflation has been going down. And they've kind of made a slight tweak today, evident in Powell's language, about we're still data dependent. They're not saying they're not data dependent, but we're also going to be forward looking. So if the 100% Buddhist monk regimen of pure data dependence of, let's say, six months ago was still in play, I think they might be a little bit more dovish and more inclined, if not to cut rates, to signal to the market that they are going to cut rates.

But now Powell is saying, look, yes, in the data we've seen pretty significant disinflation, but our inflation expectations are still going up because tariffs. I mean, everyone says tariffs are going to be inflationary, all of our economists and all of the economists outside of the Federal Reserve as well. So we have to be a little bit forward looking. So that is a notable shift

from the Federal Reserve. Now, the market kind of did nothing and then started to move down after. It is hard on these Fed days. Oftentimes, there will be a question in the Fed meeting where somebody asks something, Powell gives an answer, and the market either really likes it or doesn't like it. And that's when we kind of get the post-meeting move.

And simultaneously to the Fed meeting going on, you have the president, you have all of the press discussing, you know, the the war between Iran and Israel and whether it might become a war between Iran, Israel and the United States. And so it is kind of hard to determine whether is it that statement by Trump?

Powell that moved the market or is it some statement that came from President Trump or somebody else in the administration that potentially moved markets? Do you think it was that moment? I think it was actually Tim Ross who was able to get that statement out of Powell. Or do you ascribe some of the moderate volatility more to to what we're getting out of the White House and the geopolitical concerns? At first, I thought it was the Tim Ross thing. But you cited some people

News flow. What was the thing you said before?

It was just we started to get more of the like Walter Bloomberg tweets about Iran. People were talking to President Trump. I think you you pointed out to me a statement he made where he's like, I don't even know what's going to happen. So, you know, I think just like that level of uncertainty, probably more likely to to have spooked the market than the subtleties of of Powell indicating that they are going to to wait and see even more.

Now, one of the other things we like to look at coming into these meetings is what is the FedWatch tool pricing in? As we've said many times, it's not perfect. And if you're thinking about it in terms of like options pricing, it's probably not the right tool to use. But in terms of the directional accuracy of like what is the market pricing in in terms of rate expectations, it's very useful. We didn't see much of a move.

You're right, Max. We didn't get much of a move. It's interesting in the December 2025 contract, you actually had a marginally pricing in a little more easing, even though the dot plot was unquestionably hawkish. So that is interesting. It's almost, I mean, it's like the market doesn't really believe that the Federal Reserve is going to be

You'll hold rates steady and that maybe these tariffs are going to be less inflationary and destroying supply and more contractionary, i.e. destroying demand. That theory that tariffs could destroy demand was was referenced several times throughout throughout the interview. But, yeah, not a huge move from the bonds. Certainly, certainly not.

Now, I want to switch topics a little bit away from the Fed meeting. You obviously were spending time in Europe for the past few weeks. I'm interested for a bit of a dispatch from the ground there. There's been a lot of talk about

you know, tourism slowing down around the world, whether it's Americans not going or people not coming to the U.S., I'd be interested to hear if there were any anecdotal sentiment indicators about this sort of change in relations between Americans and our friends in Europe.

That's a great question, Max. I'll first start by really saying that I'm very hesitant to draw any conclusion between my own anecdotal experience or anyone else's anecdotal experience and the global macro economy that affects the seven people, billion people around the world. I'll just give an example of, I think I was in some part of New York city in the summer of 2021. Um,

And I went to some restaurant and no one was there. And I'm like, oh, man, recession is imminent. And of course, we were at the hottest nominal GDP growth in pretty much the nation's history, other than 2020 when it was coming out of depression. So I did that. Anecdotal evidence is completely wrong. And of course, people have taken headlines of job layoffs over the past two to three years and shown that pointed to weakness in the labor market. But in terms of the overall data,

The white-collar job market is not as strong. But Jack, it's fun. Let's not forget that. It's fun. It is fun, but it's bullshit. It's fun, but it's bullshit. Now that we got that out of the way, I did note some slowing in the tourism sector in Greece. One errant comment from a guy there said that, I asked him, when's the peak season for tourism in Corfu, on the Ionian coast where I was, and he said it's normally now, but it hasn't started yet.

So that could, you know, there is some weakness in the Corfu tourism sector year over year. That appears to be the case. Whether there's weakness in the Greek tourist industry or European or the global tourism industry, who knows? But that one, that is a piece of anecdotal data that is slightly bearish. Yes. Okay. So,

So if look, if we can't rely on anecdotal data such as this, the Fed has told us that they are going to be probably waiting until we get more clarity on how tariffs are going to impact the economy. When do you think the next Fed meeting of consequence is going to be? And how many points of data are we really going to have to get to before we get to any sort of cutting cycle?

It's a great question, Max. First, I want to highlight you. You talked about wait and see by the Fed. The Fed is wait and see on not acting, but by not acting itself is an act of hawkishness because interest rates are moderately restrictive. So that'll clear up that thing. I think I'm just going to I think the next Fed meeting is July 29th.

I think there are several catalysts that are going to happen before then. First of all, all of the June data is going to be released in early July. So inflation and the job market is important.

Yeah, it's actually on July 30th, yeah, the Fed meeting. But two more important dates actually are, I think, the tariff dates. July 8th is 90 days after April 9th, and August 10th is 90 days after May 12th. Those are consequential dates because April 9th is the date where President Trump

gave a 90 day pause to all countries except for China. And May 12th is when he gave a 90 day pause to, to, to on Chinese tariffs. So July 8th is when tariff rates are set to go back to their extremely high levels of liberation day unless they reach a deal or make it make some sort of extension. And August 10th is when those tariff rates are set to go back on,

on China at also very high level unless they make a deal. So there, of course, is so much uncertainty, but those are at least some dates that people, when they're mapping out their calendar for economic events, I think could be quite substantial. Although it's possible the market will move well in advance of that with the incoming news flow. So yeah, by July 29th, I think we'll have a lot more clarity. And then Jackson Hole is...

I think in August, probably after that. So I think we're the next two months, we're going to get a lot, a lot more clarity. Although Max, I remember, you know, I'm young enough to remember February, 2025, when the real date was going to be April 2nd. And once April 2nd comes, then we get all of this, this, this clarity. So it's, it's possible that president Trump, you know, moves the goalposts and, or moves the ball, however you want to say it once again, and just,

reaches a deal or doesn't reach a deal or gives another extension and surprises me and everyone else in markets once again. We've been mostly discussing how this is going to impact interest rates and the Fed's path. But what about markets? Are you concerned at all about tariffs coming on and how that's going to impact the market?

Yes, I am. And I just want to update people on my thinking. And, you know, I could just have a dispatch every single day where I'm sharing my thinking, you know, no one wants that. I definitely don't want that. But I do want to update people is that, yeah, I think the last time I shared my own views was with you, Max, and you shared your views. And I was very bearish at the time. I, you know, probably one week after that, you know, got

Got a lot more constructive on the market because I pretty much realized that the market is sniffing out that these tariffs are going to be a nothing burger. And I changed my view accordingly. But I am worried about July and August because of these tariff rates. So unclear if this will be a reprieve.

Yeah, it's just so hard to read Trump. I thought I read Trump correctly and I did for a few days in April, but then he pulled the ball and

The tariff rates were lowered and there was a 90-day extension to 10%. And again, 10% a year ago would seem super high. But of course, Trump has conditioned us and every other market participant like a Pavlovian dog that 10% actually is super low because you're not comparing 10% to 0% or 2%. You're comparing 10% to 145% on tariff. So the real art of the deal that Trump has done is not with China or Europe. It's with Europe.

investors in the US equity and bond market. And he's played that game quite well. I had the great pleasure of getting to sit in and host Monetary Matters for two episodes while you were gone. One episode that came out earlier today with Mike Green and another episode with Vincent Deslois from Stonex. And Vincent said he thinks that we're going to get some market turmoil in July.

as those tariffs come back online, but also that we are entering into sort of the earnings blackout period when companies cannot do buybacks and that the buybacks have been extremely important for key

keeping the market afloat over the course of the year. And so forgetting this news, and this was all sort of prior to the Israel and Iran conflict breaking out. So we have just an extra flavor of risk on top of those things that Vincent was citing. Mike was very bearish on the economy, but

As he also pointed out, we have now reached over 50% passive, and if the flows continue to come in to...

to passive investment vehicles, it's going to be very, very hard for the market to have any sort of sustained downward movement. There might be dips here and there, but as long as money is going into passive, that's probably not going to falter too much. And one of the other things that I thought was really interesting was...

that the ETF flows are actually, it's not like there's new money coming in. It's a lot of people selling out of active mutual funds. So the net flows into the market are relatively benign, but it's that the dollar is leaving an active mutual fund manager who owns a bunch of value stocks that

are not nearly as impacted by this passive multiplier phenomenon and entering into ETFs and indices where the stocks that are highly priced, inelastic, I guess, are

are being driven higher by those dollars, despite the flows being relatively flat. Yeah. But my question there is, why is it that Microsoft has a market cap of $2 to $3 trillion, actually more than $3 trillion, and the value company that the poor active manager is forced to sell has a market cap of $600 million? Is it because of just flows and unfairness? Or could it be perhaps that Microsoft is maybe a better company and has grown its earnings?

so much more than that company over the past 30 years. Yeah, well, I don't think he or I would dispute that, but the argument could be made that the, you know,

What also something that he and Vincent agreed upon was the sort of permanently higher plateau of multiples. And so it's not that Microsoft isn't on top of the index and getting all of these flows because it doesn't deserve it. It's that the price that people are willing to pay for Microsoft and arguably maybe not willing to, but have to pay to get access to that quality is,

is going to be higher. And if you are waiting for it to get cheaper, that that might not happen. That is until at least as Mike says, until the flows reverse. And that's just a demographic question because, you know, the old people own all of the assets.

Yes. And I mean, the S&P does have a disadvantage of it does get stocks when they enter the index once they just had a huge run up. For example, Palantir, which I believe is on a trailing month basis, I think trading at 700 times earnings.

is you just enter the index. And obviously, it would have been a great time to buy Palantir before the huge, huge bull run it's been on. But yeah, I'm not particularly bullish on a stock that is even on trillions, 700 times earnings, even if it is growing at a fantastic rate with profit margins, which of course it is. I don't know, Max, I read a book, I read several books on vacation, but I did read a book about NVIDIA called The Thinking Machine and the Microchip. And

I don't know. I mean, just if you look at a chart of NVIDIA's profit and revenue growth, I mean, I think that's something a little going on there that's not just passive flows. But I do get the point. And I also think that the Mag 7 is... I mean, of the Mag 7, the ones I like the least would be Tesla and Apple and Amazon. I don't really understand Amazon as well, but other companies of the Mag 7, they look pretty good to me. And I mean, what...

You're going to buy Microsoft's growing at 20% and it has a multiple way cheaper than Costco at 70 times earnings. I mean, I think there are... Yeah, if these companies weren't growing, of course, they'd be super, super overvalued. And the valuation is historically expensive. But with the growth, I don't think they're ridiculous, especially NVIDIA. The question of NVIDIA is, is it cyclical like semiconductors have been in the past? Or are we in this new super cycle?

Max, I'm young, you're young. So we don't have a huge, huge sample size. But literally, anytime I've encountered the phrase super cycle, it's always ended badly. Commodities and crypto, it ended in a huge disaster. So yeah, once people start using the phrase super cycle for AI, that's when I'll start to turn bearish. But yeah, I mean, NVIDIA's clients are incredibly well-capitalized companies, and they don't seem to be...

They don't seem to be reducing their spending. One thing on... I think, Max, it's like, you know, everyone loves Broadcom now. I haven't really looked into it that much. But, you know...

A lot of the companies have a higher multiple than NVIDIA, but they're growing so much slower. I'm like, what's going on? What's the argument? But yeah, I just do feel like I've got a slightly better understanding of, after reading that book, just of the chip world. And I mean, I literally knew zero about that in the spring of 2023 when I first interviewed Philanthropist.

Citrini when Nvidia was not at the current level it is now or any of these other AI stocks. But I'm kind of gradually learning and learning a little bit. By the way, if people are interested in AI, obviously VanEck, a sponsor of the show, does have a product that has done quite well. But yeah, I think Max, I don't know. I think people are maybe

Maybe a little too bearish on AI. You know, I'm not saying that be bullish, but I'm saying, you know, maybe be a little too bearish. Well, I certainly like am generally a skeptic, especially when things go up a lot. It's just naturally my reaction. That is my gut. Something like I'm almost kind of working on. But oftentimes when you start, quote unquote, like working on that, it's like,

close to the top right uh so that's also like an indicator for me that when i start questioning my priors like well is there a reason why um but what do you mean well for instance like jack you and i we we work together at real vision and remember in 2021 we were working on this this content campaign and the content campaign originally was like is this a giant bubble

And there was all of this talk like Cathie Wood was out everywhere. And, you know, the campaign shifted to be like, is everything a bubble or is that the wrong question? And this is the new, you know, the new age of prosperity. The background is you and I both thought it was a bubble. And I believe you came up with that idea of is it a bubble?

Look, there were a lot of people calling that period a bubble, but either way, at that same time, you had a lot of people who had made a lot of money and, and people who, you know, you know, beyond Kathy wood is, is easy to kick while she's down, but there are plenty of other people who are still, you know, high, highly respected, uh, who were basically betting on this thing, you know, uh,

Betting on this thing continuing up and to the right. And, you know, we all had to ask ourselves, like, is technology changing the world? Like, and, you know, some of those some of those companies are still down, you know, 90 plus percent.

Obviously tech sold off quite a bit in 2022, but here we are, you know, way higher for a lot of those names. So it does matter. And I guess what I'm trying to get into on the AI side is you read that book. I interviewed Val Zlata, who is the CIO and founder of a hedge fund called Analog Century Capital Management. Analog Century, they're about a little over two, I think it's $2 billion now. Um,

They got some money recently from Millennium, and they trade exclusively hard tech. So most of hard tech is semiconductors. These are...

Guys who they have been following these sectors since before the AI megatrend. They understand the cyclicality in this. And even they are, we're saying like, you know, we don't really think that this is going to be cyclical like that. And as well, you know, Val had been around in 2000. And he made the argument that the sort of 2000 analogy with like fiber is just not,

and that he puts it more in cloud. So if you remember, there was...

As the Mag7, which at the time it was the FANG stocks, were marching higher, people were like, how is Amazon worth all this? It's a store. The margins on their products are not that good. And in the background, what was really driving Amazon higher was their cloud business. And there was just a lot of arguments that eventually the cloud spend would have to come down. And here we are.

almost a decade later, and the cloud spend has just continued to march up and to the right. And his argument is that the analogy for AI is actually much closer to cloud. He makes it more eloquently than I do, despite English being his second language. Probably maybe even like his third. I don't know. So I would recommend everybody go listen to that interview if you

like me, are somebody who missed NVIDIA on the way up, missed a lot of these AI stocks. And you're wondering,

Did I miss it all? Or is this truly like a mega trend that is going to go higher? I mean, I don't know if you saw the commentary around KOTUS. I did actually. I was, yeah. I'm glad you brought it. Let's talk about that. Go ahead. Go ahead. Yeah. So the 40 stocks that they think are, you know, and they gave their market cap predictions for 2030. And I think Nvidia was in the top five. Microsoft, I believe, topped the list. Yeah.

Broadcom, I think, was in the top 10. I mean, here, let's get this. Let's get a pullback. KOTU 40. Called the Fantastic 40, yeah. Yeah, KOTU's Fantastic 40, which is super ironic because going back to this 2021 period, there was a guy who I went to go work for

His name is Harris Kupperman, and he wrote a piece about the Tiger 40. So during this period, you obviously had Cathie Wood with all of those names like Powering Higher. And then there were maybe some group of higher quality software names that were owned by Chase Coleman and others.

and Tiger Global. And he wrote this piece about the Tiger 40 that's like, hey, once all this like SPAC, like total garbage blows up and the tide comes out, like there are actually 40 companies and these are companies that make money. They have customers like they're not they're not the SPAC garbage that that, you know, is really emblematic of the bubble. But these things are ridiculously overpriced, too. And, you know, there's a lot of people who own both of these types of companies and

As these other names get hurt, it's going to come back here too. So it's just ironic that here we are making analogies and comparisons to this other period. And Chamath just today tweeting like, should I launch a SPAC? Goldman dropped their ban on SPACs. So here we are in 2025 and history doesn't always repeat, but it definitely rhymes. I've got a lot of thoughts, Max. First of all,

My point was that if you're a hyper bull on AI, there are a lot of people who are a huge believer in AI, but they are diversifying their bets. And they're like, oh, NVIDIA is so 2023. I mean, you got to get into it. I mean, that's basically what KOTU did. Based on their market cap forecast for 2030, market cap of NVIDIA of $5.6 trillion, and it's currently $3.5 trillion.

That's a 58% gain from now until 2030. So that's a 10% a year gain. They're way more bullish on, for example, Arm Holdings. But if AI is this transformation thing, I mean, again, I've read a book at Nvidia. I haven't read a book about Arm Holdings, but I've seen the chart of Arm's financial performance, not the stocks, the actual business and the revenue and the earnings. I don't know.

I kind of know it by it, but, you know, Co2 and its well-remunerated researchers are definitely, you know, know so much more and are smarter than I am. But, yeah, I think NVIDIA is...

deserves its market cap, in my view. Yeah, Max, to me, this does feel different. I mean, in 2021, there were just objectively fake companies that were going to market with no revenue and basically just science projects as a business plan. And they lost... They were just hemorrhaging money and lost money and went bankrupt. I was short one of them. To me, Max, I'm only...

seeing a multiple expansion in legitimate companies that dominate their industry and are growing tremendously and are profitable. The Cathie Wood stocks is unprofitable stocks in 2021. I mean, I'm not going to argue the quantum like the quantum. Yeah.

The quantum is beginning. It's beginning the quantum, the quantum bubble. I agree with Martin Shkreli. It's a bubble. I'm not a scientist. What do I know? Um, it's, it's either a bubble or it's going to transform, uh, computing. And like, if you have a 50 character password, it's going to be cracked. So like, who cares, you know? Um, but yeah, I think that's a bubble, but that, that bubble is, you know, five months old. So do bubbles last five months? They typically last longer. So I'd say, um, you know, early to middle stages of a bubble, if it's a bubble, but, uh,

I, yeah, I just, I don't buy it. And Max, the Recessionistas, I mean, the Recessionistas have been singing the same song for so long. And I, you know, I believe in them many times. I've, you know,

I am susceptible to being convinced of a recession argument that's negative. The positive is that I can quickly change my mind. So I've unconvinced myself of the recession case many times as well. But they did convince me once again, Max, in March and April that people can roll the tape because of tariffs. But it is phenomenal that the strength of this US economy, if the US economy doesn't enter recession with all of these tariffs, that would be just...

a real testament to the strength of the U.S. economy. And, you know, the recession will have been wrong six times in a row instead of five times. Well, that is something that, um,

again, going back to the interviews that I did while you were away, Vincent wrote a piece about like just the, the, the lack of recessions over the last 16 years and how that compares to, to history. You know, there are periods of time in the U S history in U S history where of the, you know, trailing, looking back 10 years, 40% of the time was in a recession. That was like the average. And in the last 16 years, 1% of the time has been, has been a recession. So, you know,

Clearly, something has changed. I guess if you are bearish, like, I like to short stocks, it's easier for me to like, mentally to say like, this is not going to continue, then to try and, you know, predict whether this technology is truly going to be transformational, or whatever. So that's just like works for my, you know, personality, probably to my to my detriment. But

Like housing, like, okay, so either rates continue to stay high, mortgages are unaffordable, or the economy, you know, crashes, like neither of those things like look good for how, you know, look good for housing, like, I'm happy to just keep pressing that bet until I'm

until I start to lose money on it. But if you are bearish on the economy, why don't you go try and find the areas? Because there's always, as you've pointed out, when you talk to these, whether they're recessionistas or they're people cheering on the greatest economy of all time, there are data points on both sides. So instead of trying to bet on the whole, why don't you just go where the data points

there's clarity for both of those groups of people. And, you know, to me, like that was, that was housing. Yeah. And Max, I remember when you, you put on some of your shorts, you know, in last year on, on housing. And I says, you know, I didn't personally didn't think that they work out, but they, they really have. So congratulations on a, on, on a good call there. And I, I, I do think that does speak to, you know, valuation, valuation,

does matter. And if a stock is richly priced and it's not growing or not growing faster than the market in terms of its earnings, that to me is a problem. So for example, Costco or FICO or Wingstop, you know,

people who listen to every episode, like hyper fans and I appreciate them very much. They've heard me talk about these companies for a while. Like, okay, if you're doubling your revenue and your profit margins are 60%, you maybe justify an earnings multiple of 70 or something insane. But if you're going at 7% a year, like Costco, it's like, why is your price to earnings ratio 70? I don't know. I mean, there I actually, I am seeing the...

consequences of Mike's passive argument. It's a barbell because it's either the economy collapses and we all have to buy everything in bulk to save money or the US consumer rides off with bigger and bigger cars and bigger and bigger stuff. It works in both. Costco is a bet on the rich consumer. Costco does cost $50 to be a member. I don't think Costco's business is immune to the business cycle.

Well, Jack, I think I want to wrap it up here. Is there anything else you want to touch on before we go? No, I think people, you know, can marvel at my incredible tan. You know, it's funny. Like, I thought I got a tan, but there is there is I got to say there is something about this lighting in this room that makes me look paler than I am, you know. So just people should take that into account. OK, we'll give you. And also there's something about the lighting in your room, Max, that gives you a bigger tan. Like I'd say.

Yeah. Yes. This is going to be deceiving. It's the warm lighting. It's the warm lighting. Well, Jack, it's good to have you back. Excited to have you back in the host chair at Monetary Matters. I know that we've got something recording tomorrow. I believe that'll be your first interview back. When can we expect it out? That will go out on Sunday and I'll leave the people in suspense. Okay. All right, Jack. Great to see you again. You too. Thank you. Just close this door.