Trump Fires Fed Governor Cook, Eli Lilly’s Weight Loss Pill & How to Not Get Replaced by AI

0:00This episode is brought to you by On Investing, an original podcast from Charles Schwab. I'm Kathy Jones, Schwab's Chief Fixed Income Strategist. And I'm Lizanne Saunders, Schwab's Chief Investment Strategist. Between us, we have decades of experience studying the indicators that drive the economy and how they can have a direct impact on your investments. We know that investors have a lot of questions about the markets and the economy, and we're here to help. Join us each week as we explore questions like, how do you evaluate corporate bonds? And what sectors of the stock market are outperforming?

0:31So Kathy will analyze what's happening in the bond market and at the Fed, and I'll give you our latest analysis of the equities market and the U.S. economy. And we often interview prominent guests from across the world of investing and business. So download the latest episode and subscribe at schwab.com slash oninvesting or wherever you get your podcasts.

0:54Rinse takes your laundry and hand delivers it to your door, expertly cleaned and folded. So you could take the time once spent folding and sorting and waiting to finally pursue a whole new version of you. Like tea time you. Mmm. Or this tea time you. Or even this tea time you. So did you hear about Dave? Or even tea time, tea time, tea time you. Mmm. So update on Dave. It's up to you. We'll take the laundry. Rinse. It's time to be great. These days, every business leader is under pressure to save money. But you can't crush the competition just by cutting costs. To win, you need to spend smarter and move faster.

1:35You need Brex. Brex is the intelligent finance platform that breaks the trade-off between control and speed with smart corporate cards, high-yield banking, and AI-powered expense management. Join the 30 ,000 companies that spend smarter and move faster with Brex. Learn more at brex.com slash grow. Today's number, 400 million. That's how many tons of plastic are produced worldwide every year. Roughly 40 % of that is used up for packaging, 20 % for construction, and roughly 2 % for Christy Noem.

2:28Welcome to Prof G Markets. I'm Ed Elson. It is August 27th. Let's check in on yesterday's market vitals. All three major indices rose slightly as investors awaited NVIDIA's earnings, which will come out later today. Meanwhile, long-term treasury yields rose and short-term yields declined after Trump said he was firing the Fed Governor Lisa Cook. More on that in a moment. Following the news, the gap between those yields reached its widest level in three years. as that indicates the market is betting on rate cuts in the short term and inflation later on. We'd also add that as of yesterday, following this Cook news, the chance of a rate cut in September rose to 89%.

3:12Okay, what's happening? As I said, Trump is trying to fire Fed Governor Lisa Cook over allegations of mortgage fraud. In a letter posted to social media, Trump claimed authority to remove Fed Governor's quote for cause. including malfeasance or dereliction of duty. But Cook rejected the claim, saying he has no power to remove her and that she intends to stay in her post. For context, no US president has ever tried to oust a sitting Fed governor. Okay, the first question we have to answer if Trump is firing Lisa Cook, member of the Federal Reserve Board of Governors. First question, is this even legal?

3:49Is this even allowed? Can Trump simply fire a governor of the Federal Reserve? And the answer is actually, yes, he can. The president can fire Fed governors. That is within the president's power. But only, and this is important, only if the firing is, according to the Federal Reserve Act, for cause. Now, what does for cause actually mean? Well, the Federal Reserve Act actually doesn't define it, which isn't very helpful. but you know it's a pretty common term in business and and in employment the way we generally understand for cause is that there is a real and indisputable justification for the firing that's a little bit vague but sort of generally speaking it means it's not just that they're not very good at their job there's something like misconduct or a breach of policy or some sort of criminal activity.

4:46It is a distinctly serious reason as to why the employee had to be fired. Now, is there a serious reason here as to why Lisa Cook must be fired? Well, according to Trump, Lisa Cook engaged in mortgage fraud. She committed a crime. And that does sound like a serious reason. The problem is, though, nothing's been proven. Nothing's been brought to the court. Nothing's been reviewed by a judge or a jury. In fact, she hasn't even been formally charged yet. So as of today, these are purely allegations. This is Trump and his allies saying that she's a criminal and then using that claim as the cause to fire her without having even brought her to court.

5:37so that's what is apparently for cause here the next step of course is she's going to contest this and in fact that is exactly what she said she's going to do put another way this dismissal this firing is far from over i mean it's going to go to the courts now it might even go to the supreme court it's a very big deal and it will be up to the courts it will be up to the justice system to decide whether an allegation of fraud meets the definition of cause. That's where we are in terms of the legal proceedings. My prediction, no, no court's going to say that just a claim meets the definition of firing for cause.

6:17But then there are all of these other questions beyond the legality of this. You know, what does this mean for Jerome Powell? What does this mean for the independence of the Fed, which has been a massive question recently? What does this mean for markets? What does it mean for treasuries, for interest rates? Lots more questions here to be addressed. So let's bring in our first guest of the day. Let's bring in Sarah Binder. She is a senior fellow in governance studies at Brookings and a professor of political science at George Washington University.

6:54Professor Binder, thank you very much for joining us on Prof. G. Markers. It's great to have you. Sure. Thanks for having me. So we wanted to get your reactions to what's happened with Trump, the president, and Lisa Cook, one of the governors of the Federal Reserve. He has fired her, threatened to fire her. Maybe she's gone. She says she's not gone. Your initial reactions to what's happened, and then we'll get into some of the specifics. Sure. So the president has the authority under the Federal Reserve Act to fire governors if there is what we call cause. What's unusual here, first of all, it's never happened.

7:34But second, what's unusual is that there's really been no demonstration of cause and no opportunity for Governor Cook to make her case about whether or not she's guilty for what they charge her. There's been no formal charges at all. And that's then quite unusual and leaves this in a bit of legal limbo over precisely whether or not she's actually been fired. Right. Yeah, this is just an allegation. As you say, there has been no formal charge that has been brought. Is it possible for an allegation to qualify as cause? Is that enough? Is there a world where a court would say, you know, they have a little bit of evidence here to suggest that this is mortgage fraud or that she engaged in some criminal activity?

8:22It hasn't gone to court. They haven't proven it. But whatever, that's enough. That's not typically how cause is litigated. Politically, it could work that way. The president says you're fired. I have this allegation. And a governor could say, I'm out of here. I don't want to deal with it, even if I didn't do anything wrong. But Lisa Cook has said, I'm going to file a suit, and I didn't do anything wrong. And how cause is typically then decided? It's litigated in the courts. It's a legal process. It's not a political process. It's not up to the president of the United States. So we've seen some reaction in the market, but it's been a little tepid, I would say.

9:04I would assume maybe the market's reacting basically in response to what you just said, which is that the grounds here to actually fire her are not very strong. And perhaps the markets are saying, we don't think that she will actually be fired. And perhaps the independence of the Fed is preserved. I am just trying to speak on behalf of Mr. Market. I have no idea. But any thoughts on the reaction from the market, your reaction to what we've seen from the markets so far? It does seem that markets have just sort of shrugged, right? And the danger here, right? The danger is that we're underestimating or Mr.

9:46Markets are underestimating the enormous political power of President Trump, right? Backed up potentially by the Supreme Court eventually, right? Yes, for sure. A lot of legal uncertainty here. But think about what the president has been doing, right? He has one vacancy already. He's been bullying Chair Powell to step down. When that wasn't working, he came up with a new one. Oh, look, I'm spending a lot of money on reconstructing the Fed. And that didn't seem to work. He's looking for openings everywhere, and he's pushing and pushing, and he's made it quite clear that what he wants is a Fed, a board, that's responsive to his demands for interest rates to be lower, regardless of what the economy demands.

10:35And the risk is that the markets are losing sight of what the president potentially can do as he gets his footprints and his toeholds into the Fed, if not his claws on the board, on the board of governor. Right. Yeah. So almost if even if he doesn't fire her successfully, he certainly sent a message to the existing governors and certainly any future governor. If you don't agree with me, you're going to be in trouble. Absolutely. And yes, absolutely. And there is a risk, as people are beginning to realize, there's a risk to the presidents of the 12 reserve banks who, by chance, calendar-wise, they are up for renewal.

11:14All 12 of them come early winter here. And their jobs depend on consent and agreement by the board of governors. That's a risk if President Trump holds a majority of the Fed. Yeah, so break down for us a little bit how these boards of the Federal Reserve, and then you have these regional boards as well. How does all of that really work? I mean, we know that there are these governors, and we know that there's this guy Jerome Powell, who's the main guy, but what is the complexion of the board? What happens, say he does get rid of her, how does that affect the board itself? Well, when the Congress created the Fed in 1913, that was remade a bit in 1935, for lack of a better word, this is the craziest, weirdest federal institution on the books, right?

12:11As you said, look, there's a board in Washington. There's spread out across Main Street, 12 other reserve banks in really today kind of crazy places, right? Two in Missouri. So, look, and then at the same time, they have different appointment powers. And certainly, the reserve banks, who are generated and selected first by the board of directors, who are themselves elected by various constituencies and appointed then approved by the board in Washington. The bigger point here, like when they make the Fed, they didn't want any single interest to dominate the price of money. Right. So they ended up with all these conflicting groups working against each other and making it harder to work in concert.

12:56And so, look, it means that at the end of the day, the president has enormous power here, but not unlimited power. Although he's certainly trying to muscle and bully his way into getting more power than the framers of the Fed certainly ever envisioned. Yeah, we wanted to get you on to talk about this because, you know, the topic everyone's talking about is the independence of the Federal Reserve, which is new to me as a concept. I've had to sort of study up on this myself. But you've been talking about this for a while, and you actually wrote a book. I'll just read the title, which sort of tells you what you said.

13:35It's called The Myth of Independence, How Congress Governs the Federal Reserve. So it sounds like the independence of the Federal Reserve, in your view, has always been kind of a question. And it sounds like perhaps this is calling it into question even more. Well, for sure. So I co-wrote a book with a buddy, Mark Spindell, who's a finance person. And what we did is to go back into the history of the Fed and to ask this question, is the Fed really independent? And the short answer here is that the Fed needs political support in order to meet its goals and its mission that is given to it by Congress, right?

14:15Low inflation, booming jobs market. It needs political support. And we can see that today, right? Right. And if Cook wants to keep her position, she needs the Supreme Court to back her up. And Powell, like, diffused all the pressure from the Trump administration, really, because the Supreme Court gave a nod to the Fed and said, whoa, Fed, you're a little special here. Right. Same thing with the bond markets. Like think about Liberation Day over the tariffs when the bond markets really sort of sent a message and the administration walked back the initial tariffs, right? That's really what the Fed needs.

14:49It needs this strong expression of support for the Fed. And if the Fed is dependent on courts, on Congress, on the markets, and a less aggressive president, then that's not independence, right? Their ability to do their job is kind of conditional on basically having respect from all these different audiences. And if it's conditional, it's not independent. And in what sense does this action now from the president change things? If it was always the case that there was at least some level of dependence in the Federal Reserve, in what sense does this change things? Or maybe it doesn't. Well, to the degree it's changing things is that the president is kind of exploiting that one provision in the act that says you can remove governors for cause, but cause means malfeasance, neglected duty, like failure to faithfully do the duties of your office.

15:47And I don't think anybody has said that that's that that Governor Cook is is guilty of that. And so he's reaching into the law. He's stretching it to meet his demands here. and, you know, it may be that he gets his way. Granted, we don't know. But again, the fact that he's pushing and pushing the Fed and Congress doesn't seem to be standing up for the Fed, markets aren't standing up. So it does seem that this is yet another episode that's kind of like directly going after the authority of the board. Well, a lot of concerning stuff there. We appreciate your time. Professor Binder is a Senior Fellow in Governance Studies at Brookings and professor of political science at George Washington University.

16:30I'm sure this is going to be an ongoing issue, Professor Binder. And so my guess is we're going to have you on again in the future. Thank you very much for joining us. Excellent. Thanks for having me. Well, you heard it from the professor. This is not very good. And this is sort of the culmination of the politicization of the Fed, which just isn't going to work if it isn't independent. I mean, by the way, this is very similar to what we've seen happening with the Supreme Court, which has itself become a highly political entity. I mean, perhaps the most consequential action you can take as a president today is to install someone into the Supreme Court whose views align with your own.

17:18And we've seen what that has done in terms of the politicization of the justice system. It's less and less about your qualifications and your sense of justice and your sensibilities, more and more about where you land politically. Do you agree with me? And now the Federal Reserve is basically in the same position. I mean, it's, are you pro-Trump or are you not? Are you MAGA or are you woke? I mean, those are the questions that are beginning to determine interest rates in America and, therefore, the price of money in America. It is increasingly moving away from an objective question about economics, and it's now becoming a political question.

18:06Are you with me or are you not? And that is very dangerous territory that we are walking into. after the break a look at eli lily's new obesity drug and if you're enjoying the show hit follow and please leave us a review on prof g markets

18:32support for prof g markets comes from found does it ever feel like keeping up with your business finance is a whole second job that's where found can help you out found is a business making platform that makes it simple to track expenses and manage invoices. You can even stash money for specific goals and keep spending in check with customizable virtual cards. Found doesn't just bring your finances under one roof. It also takes repetitive tasks off your plate. You can even automatically spot tax write-offs. And the best part, there are no hidden fees, no maintenance costs, no minimum balance, and signing up is completely free.

19:02With Found, your financial world is streamlined and your time is freed up so you can put your energy into growing your business. Oh, and by the way, other small businesses are loving Found, too. This Found user said, Found is going to save me so much headache. It makes everything so much easier, expenses, income, profits, taxes, invoices even. And Found has 30 ,000 five-star reviews just like this. You can open a Found account for free at F-O-U-N-D dot com. Found is a financial technology company, not a bank. Banking services are provided by Piermont Bank, member FDIC. Don't put this one off. I've joined thousands of small business owners who have streamlined their finances with found.

19:39Eczema isn't always obvious, but it's real. And so is the relief from EBCLIS. After an initial dosing phase, about 4 in 10 people taking EBCLIS achieved itch relief and clear or almost clear skin at 16 weeks. And most of those people maintain skin that's still more clear at one year with monthly dosing. EBCLIS, Librikizumab, LBKZ, a 250 milligram per two milliliter injection is a prescription medicine used to treat adults and children 12 years of age and older who weigh at least 88 pounds or 40 kilograms with moderate to severe eczema. Also called atopic dermatitis that is not well controlled with prescription therapies used on the skin or topicals or who cannot use topical therapies.

20:15EBCLIS can be used with or without topical corticosteroids. Don't use if you're allergic to EBCLIS. Allergic reactions can occur that can be severe. Eye problems can occur. Tell your doctor if you have new or worsening eye problems. You should not receive a live vaccine when treated with Epglis. Before starting Epglis, tell your doctor if you have a parasitic infection. Searching for real relief? Ask your doctor about Epglis and visit epglis.lily.com or call 1-800-LILY-RX or 1-800-545-5979. Tuesday on NBC, Jimmy Fallon and Bozema St. John host the highly anticipated new competition show. I hired 10 creatives from all walks of life.

20:49They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity. This is the battle for the next big idea. This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best idea win! On brand with Jimmy Fallon. Series premiere Tuesday on NBC.

21:14We're back with Prof G Markets. Eli Lilly announced the results of a late stage trial for its new obesity drug. The drug is called Orphaglipron. Crazy name. It's designed for people with type 2 diabetes who are also overweight. And in the most recent trial, it helped participants with diabetes lose an average of 11 % of their body weight over 72 weeks. However, the more impressive news here isn't the number. It isn't that 11%. It is the delivery format. because you don't inject this drug like you do Ozempic or Wagovi. You swallow this drug. That's right. This drug is a pill. No needles, no injections, and also no keeping your drugs cold in the fridge.

22:01That's what you have to do with Ozempic. So you literally just take this like you would take a vitamin or you would take an Advil. Huge news for providers, huge news for distributors, and also huge news, of course, for patients. Now, to be clear, this isn't the first update that we have gotten on this new drug. We have seen several other trials of this drug in the past several months, but none of them elicited this level of positivity from the markets. Shares in Eli Lilly immediately jumped and closed up 6%. 6 % rise in one day. Huge jump, especially when you consider this year they've been having, which so far has been a little bit tough.

22:47So for more on what makes this trial so important, our producer Claire spoke with Jeff Meacham. He is the head of healthcare equity research at Citibank. The very first data set in diabetes, there were fears of, you know, theoretical liver toxicities. And there were worries, you know, that the weight loss may be as low as, you know, maybe 5%. When it came out, there was no liver tox whatsoever. The discontinuation rates, which is a marker of kind of overall tolerability, look very compelling. They're sub-10%. And the weight loss was a little bit higher than kind of the Wall Street bogey. Fast forward to the next trial, the obesity trial.

23:37it was a really, really kind of a bad setup. Investors were expecting, you know, 12 or 15 % weight loss, you know, good tolerability, no liver toxicity. They got all of that. But it just happened to be that, you know, the weight loss was 11 and change versus 12 % as the bottom end. So you're seeing today with the third trial, I think you're seeing a little bit of a makeup of that, you know, that trade, you know, half a point, for example, of under expectations, weight loss, it was not worth a hundred plus billion in market cap, right? That was a really kind of a silly move. So I think today you're seeing with the third trial, you're making up some of that, you know, discount, right, in valuation.

24:27It essentially de-risks the whole program because now they can file with these three trials. How does Eli Lilly's oral GLP-1 pipeline stack up against Novo Nordisk's? Yeah, so it's interesting. For Novo, if you look at their oral ribelsis, it was, you know, high-dose ribelsis. The data look very good. The drug has been available for a while as an obesity drug, but it's just capacity constrained. You know, Novo can't make enough of it. But even if they could, one of the kind of drags on the profile is there's a food effect. And so a patient has to fast the night before. It's just doesn't, it doesn't really, you know, it's not seamless.

25:17Let's put it that way. And that is one of the, you know, differentiation points of Orphaglipron. You know, I think the weight loss is, It's, you know, at 10-ish percent with a 10-ish percent discontinuation rate. The efficacy looks very solid. The tolerability looks very good. And there's no food effect whatsoever. And so, you know, and there's no sort of random safety events. And so I think Lilly is much better positioned when you think of the oral, you know, what's up, you know, coming up next. And they obviously have the capacity to make a lot of the drug when you look at the investments that they've made, you know, over the past couple of years.

25:59So, I mean, I would put Lilly at definitely an advantage over Novo among the orals. I'd also say the same thing really among the injectables as well if you compare trisepetide to semaglutide. Right. So earlier this year, Eli Lilly surpassed Novo in the lead for GLP-1 prescription. And I've heard that that is basically because doctors just like it more. There are fewer side effects and they prescribe it more. So it sounds like the same may be true for Eli Lilly's oral drug if approved. If Eli gets to market with this option, do you think that they'll just run away with this lead? I think when you step back, say, two years ago, as these drugs were just, you know, being, you know, kind of launching and reimbursement was becoming, you know, a little bit more seamless.

26:58I mean, it was 50-50 in terms of share, maybe 55, you know, 45 and slightly in favor of Lilly. Just how aggressive Manjaro launched in diabetes. But now I think that number is, you know, it's sort of moved to, you know, to 60, 40. And even in the future, it could be 65, 35. I don't know if it's going to be, you know, a full 70 plus percent of the market in terms of share for Lilly. But I would say, though, that, you know, Lilly's done a better job. The oral looks more competitive. So I think that the edge will continue to, you know, Lilly will have continue to have an edge in market share in both diabetes and obesity.

27:43That was Jeff Meacham, head of healthcare equity research at Citibank. So clearly, this is big news for Eli Lilly, especially against the backdrop of what's been a pretty meteoric rise for the company. I mean, the stock is down so far this year. We've had this big pop, but it's down around 5 % year to date. But you just consider their most recent earnings, their Q2 earnings report,$15 billion in revenue up 40 % from the year before. You've got Manjaro sales up 68 % to$5 billion. And you've got Zep bound sales nearly tripling year over year to$3 billion. The world just loves GLP-1 drugs. And Eli Lilly is positioning itself as pretty much the best in class.