Let's talk about Trump's new Fed Chair.
Kevin Warsh was among the candidates for Fed Chair in Trump's first term. It went to Powell.
Warsh was considered the likely Treasury Secretary in Trump 2.0, just two weeks after the November elections. It went to Scott Bessent.
And Warsh was considered the front runner for Fed Chair, back in July, when Trump started calling for Powell's resignation. But as of last week, his chances seemed to have fallen.
And because of the latter, unlike the current Fed, he doesn't believe a strong economy means inflation.
Now, when we look back to the day of that interview, the market reaction to Warsh was positive: yields traded lower on the day, and stocks traded to record highs.
Reason #3: Both Bessent and Warsh worked for, and are very close with, legendary macro investor Stan Druckenmiller.
Druckenmiller is a mentor to both. And few in the world understand global liquidity, sovereign debt supply, and how they affect capital flows, risk premiums and market psychology like Druckenmiller.
Now we will have his proteges managing the world's most important liquidity spigots (one from the fiscal side, one from the monetary side).
Based on the above, they will be pointing in the same direction. But does it mean the business of the Fed and Treasury will mix?
It has been, already.
On that note, in a recent FT article Druckenmiller used the word "accord" to describe the relationship Warsh and Bessent would have between the Fed and Treasury.
That word has significance. And Warsh has used it himself.
Back in 1951, the Fed and the government reached an "accord" that freed the Fed from financing the government debt (ending the wartime peg that kept rates artificially low).
The 1951 Treasury-Fed Accord established the Fed as an independent central bank.
Fast forward 70-years, and former Fed governor Charles Plosser wrote a paper a few years back calling for a new Treasury-Fed Accord — another separation of powers that have been tangled by the era of post-GFC central bank intervention.
This might be the best visual representation of what he's talking about …
Now, it's important to know that Druckenmiller has been a vocal critic of the fiscal insanity the U.S. government has been running (for a long time) and the monetary policy backstopping that has been enabling it.
Druckenmiller had a long interview with a Norwegian pension fund manager around the last Presidential election, where he talked about the U.S. budget deficit from a markets/positioning standpoint, but also "as an American."
He said as an American, it's something he's "really obsessed" with, because the debt/GDP "can't go up forever," and a reckoning will come.
With that backdrop, perhaps this Warsh and Bessent pairing is exactly the opposite of what markets expect.
It may be the execution of this "accord" 2.0: End the Fed's QE business (manipulation of credit markets), stop the distortion in markets and outcomes, and preserve the value and reserve currency status of the dollar.
Give the responsibilities back to the Treasury (the fiscal side).
But doesn't Trump just myopically want easy money?
Trump has been clear in the past about the dangers of inflation, and the damage it causes for everyday people. He fears it.
But he sees the 10-year yield above 4%, mortgage rates around 6% — against an agenda he thinks is crushing inflation, by design, from the supply side (energy dominance, deregulation and AI).
That said, a new "accord" would restore credibility and confidence in the dollar, U.S. assets and the economy. On the dollar, Trump has said in the past, "if you want to go to third world status, lose your reserve currency." He respects that privileged status.
You can get all of this, and still get lower rates.
Warsh won't be cutting rates to stimulate demand, he'll be cutting rates to follow (what he calls) the structural decline of prices — driven by a productivity boom, which happens to bring down debt service costs (lowers the budget deficit).
So, if this is the case, the gold move has been right (since Friday), same with the dollar. And if the U.S. chooses this type of structural reform, those that don't will get punished (i.e. Europe, the euro).
PS: If you know someone that might like to receive my daily notes, they can sign up by clicking below …