Here's something that surfaced this week that is a bit disconcerting; leaked video of Jerome Powell admitting to a couple of Russian pranksters pretending to be Ukrainian President Volodymyr Zelenskyy that he the Fed's interest rate hike campaign has an ultimate goal to materially impact the job market to the point that it drives wages lower to kneecap inflation. This video is disconcerting for many reasons. The first being that it is impossible to tell whether this video is legitimate or the product of an AI deepfake created to stir some chaos. I honestly don't know if this clip being real or fake is worse. For the purposes of this letter let's assume that the video is real and the Chairman of the Federal Reserve was truly duped by a couple of prank callers to the point that he was willing to disclose sensitive information believing that he was speaking to President Zelenskyy in confidence.

"Fed speak" is something that is taken very seriously. Over the last two decades the words of the person with the title Chairman of the Federal Reserve have been treated as gospel by the markets. High frequency trading algos make millisecond decisions based off the words that are published after every FOMC meeting and the testimony that is given on Capitol Hill. One of the job requirments of a Fed Chairman is to be hyper-specific with their language at all times to keep markets at bay as they attempt to walk a very thin tightrope with the world's eyes on them. This leaked footage, even as benign as it may seem, shows Chairman Powell being a bit more loose with his words. Specifically him admitting that the Fed's policy has an endgoal of materially impacting the jobs market and that a recession is likely this year. To date, when in front of Congress or speaking at an FOMC meeting, Powell has had to allude to this intent without saying it explicitly so that he doesn't come off as a monster and subject himself to increased scrutiny from politicians.

The cat is out of the bag now. The mask has been ripped off. It will be interesting to see whether or not Powell and crew are able to continue hiking rates with the intent of these policies being laid bare in this leaked video.

Another interesting thing to consider with this video is whether or not raising interest rates have actually had the desired effect of taming inflation materially. Sure, they've come down from their highs, but they're still above 6% and operating on a higher base set last year. On top of that, we all know the CPI is completely manipulated so the numbers are being severely underreported. Using the Uncle Marty weekly spend index I can tell you that my grocery and gas bills have remained elevated and even seen a 10-15% increase over the last month. I am under the impression that the Fed is stuck in an impossible position and no matter what they do inflation will continue to rise. By jacking up rates as quickly as they have they have completely messed with the cost of capital to get things done. Things that lead to goods and services being delivered to the market. With the cost of capital seeing a 20x multiple over the last year one has to imagine that it has become very expensive for producers to do their thing. And since these people are running businesses and would like to continue doing so, they are forced to pass along their increased costs to the end consumer, which should result in higher prices across the economy.

Alternatively, if the Fed is forced to reverse course, lower rates and turn the money spigot back on (which seems more and more likely by the day - First Republic just went into FDIC receivership), inflation is likely to heat back up because of new monetary units entering the economy via direct injections or money creation because of looser credit incited by lower rates.

What a time to be alive. Hope you have some bitcoin.

Final thought...

Smooth Jazz is timeless.