Meet Kevin Warsh

Episode Overview

• Ed Yardeni analyzes the potential impact of a "Bessent-Warsh" alliance (Treasury and Fed), predicting a shift toward supply-side economics where deregulation and tax cuts drive growth rather than monetary tightening.
• The discussion contrasts historical precedents like the 1951 Treasury-Fed Accord with modern proposals, suggesting future Fed policy may become less independent and more coordinated with administration goals to support a "Roaring 2020s" boom.
• Yardeni challenges standard valuation models, arguing that while gold and stocks are inversely related in the short term, they track identical long-term trends, and predicts the S&P 500 could reach 10,000 by 2030 without needing aggressive rate cuts.
• The episode warns of the risks inherent in this new philosophy: stimulating an already strong economy with rate cuts could lead to capital misallocation, asset bubbles (a "melt-up"), and financial instability even if consumer inflation remains low.

Key Concepts

• The "Bessent-Warsh Accord" (New Regime): Yardeni coins this term to describe a likely coordination between Treasury Secretary Scott Bessent and potential Fed Chair Kevin Warsh. Unlike the 1951 Accord which separated the Fed from the Treasury to ensure independence, this modern accord implies high alignment. Both are viewed as "supply-siders" who believe deregulated growth is disinflationary (via increased supply/productivity). This suggests the Fed might support fiscal expansion rather than fighting it with high rates.

• Supply-Side vs. Keynesian Inflation: Traditional Keynesian economics (Phillips Curve) fears that strong growth and low unemployment inevitably cause inflation, requiring the Fed to "break" the economy with high rates. The Bessent-Warsh view argues that if growth comes from productivity (like AI), it increases the supply of goods, naturally lowering prices. Therefore, the Fed does not need to suppress demand even during a boom.

• Financial Instability vs. Price Stability: Yardeni identifies a critical tension: while a productivity boom might keep consumer prices (CPI) stable, lowering interest rates into a strong economy risks "financial instability." This leads to asset bubbles (melt-ups) and the survival of "zombie" companies due to cheap capital. Yardeni argues the Fed's original mandate was preventing financial crises, which this new dovish approach might actually provoke.

• Valuation of Non-Income Assets (Gold): Yardeni argues you cannot value Gold or Bitcoin like stocks because they lack cash flows. Instead, he uses a comparative model: cyclical inverse correlation but long-term alignment.

  • Short-term: Gold is a fear hedge; it rises when stocks fall.
  • Long-term: Gold acts as a volatility dampener that generally tracks the S&P 500's upward trajectory over decades.

• Mechanical vs. Fundamental Volatility: Market movements are often driven by plumbing, not policy. The initial drop in precious metals following Warsh's nomination wasn't necessarily a fundamental critique of his policy but a mechanical reaction to the CME Group raising margin requirements, forcing leveraged traders to sell to cover positions.

• The "Roaring 2020s" Thesis: Yardeni maintains a bullish forecast (S&P to 10,000 by 2030) based on earnings resilience ($500/share earnings potential). This model relies on the absence of a recession rather than artificial Fed stimulus. He posits that the economy is robust enough to grow organically, making rate cuts unnecessary and potentially dangerous.

Quotes

• At 2:03 - "He had a history of being hawkish when he was actually on the Board of Governors... He was just about the only one who really opposed going for QE2... other than that important liquidity measure [QE1], he thought that QE2, QE3 really weren't necessary." - Contextualizing why the market initially viewed Kevin Warsh as a threat to liquidity, though Yardeni argues this view is outdated.

• At 7:22 - "You put the S&P 500 on the same chart as the price of gold using exactly the same scale... on a cyclical basis, the S&P 500 and gold tend to be inversely related... which corroborates that gold is a good diversifier for a portfolio if you want to take some of the volatility out." - Yardeni’s framework for understanding gold's utility in a portfolio relative to equities.

• At 18:55 - "When [Kevin Warsh] talks about the Treasury-Fed Accord, he is clearly reminding us of the Treasury-Fed Accord back in 1951... The Fed basically kept interest rates very low so that the Treasury could sell government bonds... but then in 1951 the Fed came back to the Treasury and said, 'The war is over... we've got an inflation issue now... we've got to be free to do what we need to do.'" - Establishing the historical baseline for Fed independence to contrast how a new "Accord" might actually do the opposite.

• At 21:26 - "You can't have economic policy which depends on fiscal and monetary policy... at cross purposes. You can't drive a car by stepping on the accelerator and the brakes at the same time." - Explaining the supply-sider argument that if the government is pushing for growth (accelerator), the Fed shouldn't be restricting it (brakes).

• At 31:53 - "My problem is that I'm not convinced that we really need lower interest rates. If the economy is already doing so well... lowering interest rates when the economy doesn't really need it... misallocates capital." - Yardeni's central rebuttal: stimulating a healthy economy creates dangerous asset bubbles and threatens long-term financial stability.

• At 40:53 - "What about the deficit? What about debt? And their knee-jerk response to that is: 'Well, don't worry about that. We're going to have better than expected growth... growth solves everything.'" - Highlighting the potential blind spot in the Warsh/Bessent philosophy regarding structural US debt.

Takeaways

• Monitor "Financial Instability" over "Inflation": In the coming cycle, do not just watch CPI (consumer prices) to judge the health of the economy. Watch for asset bubbles and speculative manias. If the Fed cuts rates while the economy is strong, the primary risk shifts from consumer inflation to a market "melt-up" followed by a crash.

• Reevaluate Gold as Insurance, Not Growth: Treat gold as a volatility dampener for your portfolio, not a standalone growth engine. Expect it to move inversely to stocks during fear cycles, but understand that over the long decade, it essentially tracks the S&P 500.

• Prepare for a Coordinated Policy Regime: Anticipate a shift away from Fed "independence" toward coordination. If a "Bessent-Warsh" dynamic takes hold, expect monetary policy to support tax cuts and deregulation. This favors sectors that benefit from easy money and growth (tech, AI) but increases risk if growth targets aren't met.

• Look for Mechanical Selling Opportunities: When market narratives panic (like the reaction to Warsh's nomination), check the "plumbing" first. If a price drop is caused by margin hikes or leverage unwinding rather than fundamental economic changes, it may present a buying opportunity rather than a true signal to exit.