Will New Fed Chair Kevin Warsh Be GOOD or BAD For Markets?

0:00Hello, everyone. Deflation is swallowing the US economy. The new Fed chair nominee has recently changed his mind on something big, and we have the latest example of AI videos that's going to blow your mind. We're live today from the desk of Anthony Pompliano.

0:23Before we get into today's episode, I need your help. My goal is to get to 1 million subscribers on YouTube, and we currently have just over 42 ,000 of you who already hit the subscribe button. Hit that button and let's get into today's episode. President Trump announced on Friday the nomination of Kevin Warsh as the next chairman of the Federal Reserve. Warsh has still got to go through the Senate confirmation process, but I want to explain who he is, what his economic policy ideas are, and how the economy will be impacted if he implements those ideas. Now, there's a few key things about Kevin Warsh's background that I think are noteworthy.

0:54First, this man is goaded when it comes to college degrees. He's got degrees from Stanford, Harvard, MIT, Sloan School of Management. He started his career at Morgan Stanley, and then he served in the White House Economic Council under George W. Bush. He became the youngest ever Fed governor. He was only 35 years old in 2006. He was a Fed governor throughout the global financial crisis, and he had a lot to say back then. And he has served as a partner at Stanley Druckenmiller's family office for over a decade now, after leaving that Fed governor role. And this last point about Druckenmiller is really important.

1:24Treasury Secretary Scott Bessent is also a Druckenmiller partner and mentee. So Warsh's nomination makes that the second person from Druck's professional lineage to take an important role in this administration's economic and monetary policy management. So what exactly is Kevin Walsh's general philosophy on monetary policy? It's an important question for us to ask, right? Well, historically, Walsh has been hawkish. He believes that controlling inflation through higher interest rates was the correct path to pursue. And for example, he dissented against the ridiculous QE stimulus during the global financial crisis.

1:55He made strong arguments that the QE tools would distort markets, risk inflation, and erroneously expand the Fed's remit outside of its core mandate. Now, you're going to see lots of headlines about Warsh being a hawk. You've been reading them all weekend. And you're also going to see predictions that interest rates are going to be raised and asset prices will not do well under his tenure. That's literally all the mainstream media keeps saying. But the thing most people are missing is that Warsh has essentially changed his mind in recent years. Most recently, the new Fed chair nominee has been supporting lower interest rates instead of higher ones.

2:26His general view seems to be that artificial intelligence is driving significant productivity gains, and he sees that as deflationary. Newsflash, I agree with him. This has led Walsh to criticize the Fed numerous times on having interest rates too high right now. I also agree with that. Now, you don't have to be Albert Einstein to realize why Trump would like a guy who wants the Fed to lower interest rates. The most interesting part of Walsh's recent policy view is the idea of a regime change at the Fed. Now, admittedly, there's not a ton of information out there on his entire strategy. But the belief is that Warsh wants to shrink the Fed's balance sheet so that there can be larger interest rate cuts.

2:59He also wants the Fed to stay focused on price stability and employment rather than become distracted with all the nonsense and the recent fascination, climate change and DEI. And lastly, and maybe most importantly and most different, Kevin Warsh believes that the Fed leadership should not talk publicly as much as they currently do. So if you believe everything you read and see online, it looks like Warsh is gonna pursue lower rates. and a strict Fed mandate and also do his best to drive economic growth in the real economy. Each of those ideas sound really good to me. Now, I've seen a lot of the Bitcoin holders also asking what are Warsh's views on Bitcoin and how exactly would he approach the asset?

3:35Thankfully, we got a video from deep in the archive of Warsh saying positive things about the digital asset. Take a listen. Charlie Munger attacked Bitcoin. He called it evil in part because it would begin to undermine the Fed's ability to manage the economy. Or it could provide market discipline. or it could tell the world that things need to be fixed. Bitcoin does not make you nervous. Bitcoin does not make me nervous. I can hearken back to a dinner I had here in 2011 with someone who is another guest on your show. I won't say his name. Okay, I just did Marc Andreessen, who showed me the white paper.

4:16That was the original white paper. I wish I had understood as clearly as he did. how transformative Bitcoin and this new technology would be. Bitcoin doesn't trouble me. I think of it as an important asset that can help inform policymakers when they're doing things right and wrong. Now you can summarize Warsh's Bitcoin views as a belief that it could become a store of value like gold. He does not believe that it'll be a substitute for the U.S. dollar. I also agree with him on that. So what's going to happen if Warsh implements all these policies? If he implements lower short-term rates, we should expect to see growth take off.

4:50This would lead to higher prices across stocks, crypto, and risk assets. And if we get the balance sheet reduction that he seems interested in, you could see tightened liquidity and potential pressure on gold in the dollar. Now, when it comes to artificial intelligence, the productivity boom and deregulation, it wouldn't be crazy to expect inflation to stay under control and the promised quote-unquote economic boom is going to accelerate. My big takeaway is that the Trump administration is trying to engineer a high-growth, low-inflation economy. It's all I've been talking about for weeks now. They are using every economic or monetary policy tool at their disposal.

5:21But Jerome Powell and the current Fed regime, they're not helping out. They're not helping the administration. Rather, they're actively working against the administration's goals. So now Trump's nominated someone who understands global finance, he's got experience working inside the Federal Reserve, and he appears to be ready to implement monetary policy decisions that will be conducive to the administration's plan. It is going to be very interesting to see what happens, but the speculation is over. Kevin Walsh is the nominee. and now we all just hold our breath and let's see what he actually is going to do once he's in office.

5:52Ladies and gentlemen, there is a national crisis that is unfolding in the U.S. economy, but it ain't the type of crisis that you got used to over the last few years. Rather than the persistent risk of high inflation that was driven by out-of-control government spending, the economy is now being swallowed by an expansive deflationary force. There's a brand new risk and it's dangerous because it requires humans to update their mental models. They got to be able to identify, understand, and mitigate it. And we know that humans are horrible about changing their mind, especially when it requires them to synthesize new information.

6:22So first, let's discuss where the challenge lies in identifying this deflation risk. There's past experience issue, and there's a modern data error that's driving the problem. The past experience issue is that an entire generation finally capitulated in recent years. They finally realized that undisciplined government spending led to higher levels of inflation. These folks failed to see the cause and effect coming out of the global financial crisis, and they only took the lesson to heart after the pandemic era insanity that drove inflation over 9 % in the government's data. Now, the folks in this cohort, they are now trained to look at government spending, and they conclude that inflation will rise if the national debt is increasing.

6:58That was true in the past, but it's not true right now. And that's why I call it a past experience issue. People are looking at the inputs, but they're not thinking critically about what that means for modern outputs. Now, the second big issue is a modern data error. Most of the experts and mainstream reporters are still relying on the Bureau of Labor Statistics to tell them what the inflation reading is. It doesn't matter that the BLS is estimating more than 40 % of the CPI inputs, nor does it matter that the BLS continues to manipulate the data collection by leveraging unproven and discredited methods.

7:29These people simply believe whatever the government says. It's crazy to me. The Bureau of Labor Statistics is reporting inflation to be 2.7 % year over year right now. But compare that number to Truflation, which is reporting inflation under 0.9 % as of yesterday. This is a very wide gap in the metrics. In fact, the most concerning part is that the BLS is saying inflation is almost 50 % higher than the Fed's stated target. Yet Truflation is saying inflation is more than 50 % lower than the Fed's stated target. The sky can't be blue and green at the same time, nor can inflation be high and low simultaneously either.

8:04It is no secret that I trust the Truflation data much more than the BLS. True Flation uses more than 14 million daily data points and is provided by over 40 independent data providers. I will take the real-time verifiable metric over the lagging estimated metric every single day of the week. But this brings us back to the most important question in the economy today. Why is inflation falling if the government is continuing to print money like drunken sailors? This is where the deflationary force swallowing the U.S. economy comes in. There are three main contributors in my mind. The first is that tariffs are deflationary, not inflationary.

8:40I have been saying this for over a year now. I know it's still heavily debated, but I continue to explain that tariffs bring down domestic prices over time and they change consumer demand trends. There's anecdotal businesses that will show you that their input costs are rising and they will tell you that they are passing it on to the consumer. Those are anecdotes. But those anecdotes are heavily outweighed by the aggregate impact of tariffs on the U.S. economy. You got to look at the big picture, not at one single business. Now, the second thing is that artificial intelligence is the largest deflationary force of our lifetime.

9:11Companies are literally bragging on a daily basis how they are being more productive with less employees. The industry is moving so fast that it's hard for most people to keep up. And the economic incentive is to adopt this technology. And that incentive is only going to get larger. Lastly, AI is now in the exponential production phase. AI is writing code. and so we're no longer limited by human time or energy. Now, the third thing is robotics. It's a subset of AI story, but it still deserves its own call out. It is very obvious that self-driving cars are gonna be cheaper and safer and so they're gonna become the standard.

9:44And then you've got companies like Amazon that are other good examples. The e-commerce giant employs 1 million robots and 1.5 million humans. They are reportedly looking to replace 500 ,000 jobs with robots in the coming years. And that means that they will soon have more robots working at the company than humans. That's highly deflationary. So this is the three-headed monster, tariffs, AI, and robotics. It doesn't matter how much money the government prints. The elected officials literally can't spend enough money to negate the deflationary forces that are now swallowing the US economy. And yes, I know that would have been an insane statement just three years ago, but today that's the reality.

10:20New information means you have to change your mind. And so finally, this brings us to the important question of what should we do from here? If inflation is under 1%, it is obvious that the Fed should do an emergency 50 basis point cut. They don't have the luxury of waiting longer. Artificial intelligence is accelerating, which means the deflationary force is only going to get stronger and more pervasive. You can think of it kind of like a virus. Once it's unleashed, it cannot be contained and it will not slow down. The only thing that we can do is address the threat using other measures that are within our control.

10:52Companies and people are economically incentivized to use AI more. We all do it. The AI tools are starting to exponentially produce more AI products and services. Claude Code wrote 100 % of the code for Claude Cowork. There's example after example that are now made in public. Now, if you Google exponential curve, it will show you how fast this thing can compound. And there needs to be an immediate aggressive rate cut by the Fed where they risk a deflationary situation. Consumer prices of various goods are going to come down. And that's a positive outcome for the average American in the short term.

11:24but wages can still fall, unemployment can rise, debt can become much more burdensome and there is a potential for a deflationary spiral. We need a 50 basis point emergency rate cut. And again, I know that's gonna sound crazy to some of you but I implore you to ask yourself the following. Do I still believe that inflation has to happen if the government is spending money? Do I understand the effects of artificial intelligence, tariffs and robotics on prices of goods and services? And am I willing to bet a material part of my net worth on assets that can only succeed if inflation is higher than normal?

11:55If the answer to any of those questions is maybe or no, then you got work to do. Spend the time this week learning about these things. You can start off by asking your favorite LLM to explain these topics and issues to you like a five-year-old. Even better, you can even connect your accounts to Sylvia, CFOsylvia.com, and have her tell you what would happen in a deflationary environment or if the U.S. government runs the economy hot. No one could have predicted that the economy would be run hot and not have inflation. But here we are. High growth, low inflation. This is literally the dream of every politician and central banker in the world.

12:30All right, you guys know that sometimes I see these videos online and I gotta ask myself, is that AI or not? And the latest one was posted by Nick St. Pierre. He says the delta between the AI content you typically see on X and what a true storyteller like Darren Orofsky manages to produce with the same tools is truly insane. Here's the trailer for his new weekly series about the year that shaped a nation called On This Day, 1776. Watch this AI video and tell me you're not impressed. The rebellious war has become more general. Too many still unsure of why we fight. We have it in our power to begin the world over again.

13:10There is no way but for. We are now the troops of the United Colonies of North America. For the purpose of establishing an independent empire. Who are you? Massachusetts! Let's not surrender.

13:40There you have it. That is just incredible. Not only is the creative and the storytelling amazing, but the visuals that you are seeing that were created by AI, it is just mind blowing that we are already here. Remember the technology is the worst that it's ever going to be moving forward. These things are going to get better. People are going to understand how to use the tools better. And guess what? If you can use AI to create that trailer, how many jobs weren't needed? How deflationary was it on that single video? This is what we keep talking about. Artificial intelligence is great for the consumer, makes us smarter and it gives us access to information.

14:14It makes creative people be able to do their job better, faster, and way more entertaining. And then, of course, the impact on the economy is that prices go down. And this is why I continue to say, let's cut interest rates. Let's enjoy the artificial intelligence that we're able to use. And let's have the economic boom that we were promised. Be good for all of us. That's it for today's show. Thank you guys so much for watching. Please remember to subscribe on YouTube. And I'll see you guys all live from the desk of Anthony Pompliano tomorrow.