Your money has a new boss, say hello to Kevin

1️⃣ Your money has a new boss, say hello to Kevin

Kevin Warsh has already been confirmed by the Senate. Historically known as an inflation hawk, in recent months Warsh has been projecting a more critical stance toward the Fed, arguing that current interest rates restrict growth too much. Exactly the same thesis as Trump. 

Warsh is inheriting a rather fragile economy, especially at the sentiment level: there is more domestic pessimism, elevated gasoline prices, insecure small business owners, and a confused consumer. And while these transitions have almost never occurred at "perfect" times, the shift in monetary policy has never been a "smooth" transition for the markets.

Changing the Fed chair in this environment is like changing a bus driver in the middle of a steep, foggy descent. The outgoing driver (Powell) insisted on keeping his foot firmly on the brake to avoid running off the road; while the new one (Warsh) is thinking about releasing it a bit to move forward faster.

💡 What you should know: The monetary transition always introduces volatility. Although the market anticipates a more expansive stance (at least in the short and medium term), Warsh's reputation has everyone on the lookout for potential surprises.

2️⃣ Trump, Xi (and half of Silicon Valley)

Trump and Xi finally sat down to catch up in Beijing, after 8 years of not seeing each other on Chinese soil.

And yes, they talked about the typical stuff: tariffs here, stability of global energy routes there, Taiwan, diplomatic press releases with carefully chosen words, and all the usual protocol. 

But what stole the spotlight was Trump's "hand luggage": a small group of 17 US corporate titans, the vast majority being the crème de la crème of technology.

Apple's Tim Cook, Nvidia's Jensen Huang, and several others were the presidential "plus one". But perhaps the one who grabbed the most attention was Elon Musk. Despite a history of public ups and downs in the past, this time Musk was presented by Trump himself as a key player. 

Looking at the photos and comments, the meeting between Trump and Xi seemed less like a traditional geopolitical summit and more like a government-sponsored Silicon Valley school field trip. 

Now, bringing the story down to earth a bit: analysts do not believe this was "the great trade peace" by any means. There was no definitive dismantling of tariffs or any magical solution to all the problems between the United States and China. Rather, the meeting is seen as a fairly pragmatic attempt to tone down a relationship that had become too tense, volatile, and unpredictable.

💡 What you should know: Trump and Xi didn't fix the world, but they did seem to agree on something like: "let's keep the building standing and please, let's not yell at each other in front of the neighbors". The contracts, the deep-seated fights, and the sore spots are still there, locked away. 

3️⃣ Investing in the S&P 500 is riskier than you think 

A few days ago, someone left a comment on an old video of ours that says:

“11% only for the super aggressive profile? But if the S&P 500 gives approx 10% annually in the long term, it is also considered a passive and safe investment for obvious long periods. So those who invest in S&P 500 have an aggressive profile? I don't think so”

This is something we have seen time and time again over the last 6 years, and although we have mentioned it several times, we wanted to address this interesting comment once more in a video with additional context, since this understanding of “risk” is probably one of the reasons why we could end up with a lower return than expected in the long run.

We also show you several numbers that tend to be misleading and tell us nothing as investors, and which ones we actually need to consider 👇

4️⃣ Reports exposing dangerous inflation

This week there were 3 macroeconomic indicators that kept the cold water running on our reality check.

On Tuesday, the Consumer Price Index (CPI) for April accelerated to 3.8%, driven by a 17.9% increase in energy costs. On Wednesday, the Producer Price Index (PPI) surged by 6.0%. And on Thursday, it was reported that retail sales ticked up by 0.5% monthly, which is a modest figure.

In all cases, the changes are attributed to higher energy costs, especially gasoline.

To understand it better, and following the pizza parlor example we gave a few weeks ago, if flour and electricity go up by 6.0% (PPI), the pizza parlor owner passes on part of the impact by raising pizza prices by 3.8% (CPI). Their regular customer ends up spending 0.5% more (retail sales), but not because they bought more pizzas, but because paying for the usual pizza now costs them more.

💡 What you should know: The combination of an elevated PPI and retail sales impacted by energy costs reduces the playing cards in Warsh's hand. Making aggressive rate cuts is not the most logical move. Don't be surprised if we start hearing stagflation forecasts again.

5️⃣ The S&P 500 is still enemies with Newton

Market optimism seems to exist in a parallel dimension to macroeconomics. Despite evidence of inflationary pressure and Warsh's confusing stance, the stock market continues to rise.

The S&P 500 crossed the 7,500-point barrier for the first time on Thursday, before retreating to 7,400. The 7,500 mark was probably the first sign of extreme overbuying. However, it must also be understood that a large part of the reason for these gains is that many of the heavy corporate reports are beating expectations.

💡 What you should know: Reaching the 7,500-point level is a significant signal that momentum remains strong. However, many eyes (including ours) are on the new direction of monetary policy, anticipating healthy corrections in the short term.