Warshs Mark Antony Moment

Warsh’s Mark Antony Moment I really wanted to go with Warsh is “puttin’ on the foil” as the title for our Jackson Hole preview, but I’m told the Hanson Brothers might not be as iconic as I thought. In any case, of all my failings as a parent, getting my kids to finally watch Slapshot is one of the easier ones to correct. I felt the “vibe” of Warsh “puttin’ on the foil” in the green room as he gets ready to speak to the Jackson Hole crowd was good, but today we’ll go a little more “highbrow.” Friends, economists, central bankers, lend me your ears; I come to bury inflation, not to praise it. As you know we have been on the side of No Cuts: • We discussed this along with the danger of Cheap Chinese Compute on Thursday on CNBC. • On Friday, we discussed Iran, ProSec™, and the Fed on Bloomberg TV (starts at the 2:19:40 mark, with Lisa giving her best Seinfeld impersonation of No Hikes For You (last weekend’s T- Report)). The segment before discusses why the Fed is still going to hike 75 bps, so the combination of the two segments makes for some interesting viewing. • The Path to a September Rate Cut (Despite AI Inflation). Restarting the conflict in Iran has not been good for this timeline, and the data task force is likely to take longer to come back with recommendations than I’d like, but the points, I believe, are still valid. Arguing about what data the Fed uses and how they interpret the data is not new for the T-Report: • A few “oldies but goodies”: o You're So Vain - July 2022. o Not that Anyone Cares, but OER seems Crazy - October 2022. o Inflation Dumpster Dive - October 2022. o More Inflation Dumpster Diving - November 2022. o Threading the Needle – December 2021. “Pointing out the risk that CPI is understated due to the shelter component.” o Inflation – Yes. Hikes – No. Taper – Maybe. August 2021. The Fed has a script and will follow that script: Act 1: Say it is Transitory. Act 2: Question how it is measured. Act 3: Say it is Transitory. Act 4: Say it is Transitory but talk about multi-year averages… The role of a strategist is to determine what is likely to happen, not what one wants to happen. This report may skew a little to the “want” rather than “expect” side of the equation, but sometimes it is healthy to vent (and possibly influence policy). The Warsh Reaction Function is Clear Okay, that is probably an overstatement, but I think worrying about the reaction function is missing the main point. The main point is to figure out what data Warsh is going to react to! The “reaction function” consists of two parts: • The data that feeds into the equation.

Warsh’s Mark Antony Moment • The equation that processes the data to get an answer. Why do so many people still think PCE or some other data point (that has likely led to bad policy decisions in the past) is what Warsh will use? I suspect his “reaction function” will be more or less “normal,” but what will be unusual is what data he uses to input into that function. That is a key premise to my view on how he should attack his Jackson Hole Speech. The Speech I Would Give This is definitely a mix of what I’d say, what he may say, with a bit too much Shakespeare to keep the report aligned with the title. Mark Antony’s speech starts with one thing and ends with pretty much the exact opposite, which hopefully I’m able to replicate here (and I was tempted to put on the foil to help write this). Friends, economists, central bankers, lend me your ears; I come to bury inflation, not to praise it. Inflation is Bad, But… Step 1 – Argue inflation is bad, but it is at least a little unclear that this is always true, or if there is some scientific method to determine what level of inflation is bad. Is inflation bad? Yes, some level of inflation, historically, has hurt a segment of the population. Do we know that exact level? No. Well, some say 2%, but why not 0%? Why not 4%? 2% seems like an awfully convenient round number. If we had rigorous scientific backing it would be one thing, but unlike “hard sciences” much of what we do in economics is conjecture. [Step 1a - inflation is bad, but how do we know 2% is the “right” target?] Is inflation bad? Yes, but don’t we need to look…