The Fed Chair Just Admitted Inflation Is a Tax... And He's About to Raise It

AI Spending as a Potential Disaster [0:00]

• The demand for AI is present, but the cost of the necessary computer equipment is immense, and it rapidly becomes obsolete, forcing continuous replacement in an "arms race."
• Companies are rewarded for how much they spend, not how much they earn, with the biggest spenders perceived as the biggest winners, which is seen as unsustainable.
• The customers of AI equipment sellers will eventually be unable to purchase more because they are broke and can no longer borrow, signaling a potential collapse.
• The current situation is viewed as a disaster in the making, with no one considering the endgame and everyone focused on participating in the hype.
• The cost of AI equipment is more akin to an operating expense than capital investment due to its short lifecycle, leading to significant losses for hyperscalers.

"So this is, I think, a disaster in the making. Nobody really is thinking about the endgame. Everybody is just trying to get in on the action."

Inflation Data and Market Reactions [0:49]

• The bond market experienced a sell-off, with the 10-year Treasury yield reaching 4.62% and the 30-year reaching 5.11%, seen as the beginning of a larger move.
• Gold saw a sell-off of about $100 an ounce, trading below $4,000, partly due to anticipation of the inflation report and potential hawkish statements from the Fed chairman.
• Markets reacted positively to the June inflation data showing a 0.4% drop in CPI (headline) and a year-over-year increase of 3.5%, with core inflation unchanged month-over-month.
• However, the speaker argues this is not truly good news, as the main driver was a 30% drop in oil prices due to a temporary ceasefire, which has since ended, causing oil prices to rise again.
• The official government inflation numbers are questioned for potentially capturing only half of the actual price increases experienced by Americans.

"But again, this still mixes the bigger picture that inflation is good for gold. It's not bad for gold."

The Fed's Inflation Battle and Gold's Role [3:01]

• The market's reaction to stronger inflation news as a sign that the Fed must fight harder is seen as missing the bigger picture: the Fed has already lost the inflation battle.
• Hotter-than-expected inflation numbers indicate the Fed's inability to bring inflation down, making inflation bullish for gold as it signifies the Fed's limitations.
• Inflation has been above the Fed's 2% target for nearly six years, suggesting the Fed lacks the intention or wherewithal to bring it down.
• The Fed's consistent prediction of inflation returning to 2% within two years is criticized as being without concrete evidence, merely a statement of their target.
• The Fed's inability to lower inflation to 2% without causing other undesirable economic outcomes is the core issue.

"But all of this misses the bigger picture that the Fed has already lost the inflation battle. That's what all these hotter than expected inflation numbers show."

Misunderstanding of Inflation and Fiscal Policy's Role [11:31]

• A major frustration is the misdefinition of inflation, with discussions centering on rising prices instead of the actual expansion of the money supply and credit.
• The government's insistence that falling prices would be a disaster is questioned, especially when consumers are suffering from high prices.
• Congress is criticized for contributing to inflation through deficit spending, which the Fed then monetizes by artificially suppressing interest rates.
• The combination of monetary and fiscal policy working in tandem is identified as the root cause of inflation.
• Congressmen and women are blamed for demanding action on inflation from the Fed while simultaneously voting for deficit spending that fuels it.

"But then the other thing that really frustrates me always about these hearings is that you've got all these congressmen and women that are upset about inflation and they're asking the Fed, 'What are you going to do about it?'"

The Federal Reserve's Size and Efficiency [18:03]

• The Federal Reserve employs 23,000 people, a number considered excessive for setting interest rates or performing its functions.
• In 1914, when the Fed opened, it had only 40 employees, suggesting a massive inflation in its workforce over the past century.
• The argument is made that with modern technology, the Fed should require far fewer employees, or even be automated by AI.
• The large number of employees is attributed to the Fed undertaking many functions beyond its original mandate.
• The idea of replacing the FOMC with parrots is humorously suggested, implying a lack of substantive work.

"The Federal Reserve employs 23,000 people. What the hell do these 23,000 people do? Why do we need 23,000 people to to set interest rates?"

The Flawed 2% Inflation Target and "Regime Change" [22:12]

• Fed Chairman Jerome Powell (referred to as Kevin Walsh) admitted that a key mistake was attempting to raise the inflation rate, which resulted in higher inflation.
• The 2% inflation target is criticized, with the suggestion that it should be a ceiling, not a target, as it encourages aiming for inflation rather than stability.
• The concept of "inflation averaging" is dismissed as nonsense, used to justify higher inflation without a genuine mechanism to bring it down.
• "Regime change" at the Fed is deemed illegitimate because nothing fundamental has changed in policy or outcomes, despite new leadership.
• The speaker believes that true regime change at the Fed would require corresponding changes in Congress and the White House to address deficit spending.

"Worsh admitted with in hindsight, you know, that a key mistake that the Fed made was that it attempted to raise the inflation rate. They were trying to get a little bit more inflation and that that was the reason that we ended up with a lot more inflation."

The AI Bubble and Market Risks [49:08]

• The AI bubble is compared to the dot-com bubble, with companies like Nvidia making profits, but these gains come at the expense of hyperscalers' losses.
• Large tech companies are transitioning from cash-rich entities to significant borrowers due to massive AI-related capital expenditures, sucking up cash and driving up interest rates.
• These companies are losing money when depreciation is considered, as the equipment lifecycle is much shorter than the depreciation period.
• The demand for AI products is high because they are often priced at a loss or given away for free, which is unsustainable.
• The AI arms race is driving significant spending without a clear path to profitability, risking a market crash.

"So, all of this spending could be a complete waste. And I think we're we're headed for a big drop in the market."

Michael Saylor and Bitcoin Investment Strategy [58:21]

• Michael Saylor of Strategy sold $467 million worth of company stock to increase cash reserves, rather than selling Bitcoin, which is seen as destroying shareholder value.
• This decision indicates Saylor's fear of selling Bitcoin, as he believes it would drive down the price, suggesting his "Bitcoin reserves" narrative is not as solid as claimed.
• The speaker anticipates a market crash for Bitcoin regardless of Saylor's actions, predicting a significant price drop if it falls below $58,000.
• The speaker suggests that those who don't sell Bitcoin now will regret it, as the price is expected to fall substantially.
• The rapid obsolescence of AI equipment and the unsustainable spending are highlighted as precursors to a market downturn.

"Sailor knows if he starts really selling Bitcoin, the price is going to crash. Now, the problem is it's going to crash anyway because the market realizes the buy that he's in."