Market Lab Report
by Dr. Chris Kacher
Markets are forward looking: A strong economy can mean tighter conditions ahead
When the economy is healthy, central banks look to potentially stall cuts or even tighten. Since markets are forward looking, they may be telegraphing such an eventuality given the 4%+ GDP growth and perceived inflation rate based on CPI. Further, companies build inventory and engage in heavy capital spending which pulls cash out of financial markets. These moves typically occur during periods of strong earnings, roaring economic growth, and high investor enthusiasm. But even with this form of reduced liquidity, QE in its various forms remains in force.
Tech-heavy indices such as NASDAQ Composite are showing strong distribution off recent peaks, so in the meantime, keep stops on any remaining long positions tight, dont get piggish on any short positions, or wait it out on the sidelines. The overvalued tech sector selloff, AI overspending fears, rotation out of mega-cap tech / AI stocks, and the government shutdown are all part of market pauses and pullbacks. Close monitoring of price/volume action in leading names and major indices will always show the speed and duration of the pullback, thus provide actionable entry points, short or long, or as news unfolds, something more impactful in either direction.
If AI productivity gains accelerate and fiscal stimulus ramps, the liquidity drain could be offset, keeping the bull alive longer. Strong earnings reports from NVDA and AVGO show that AI demand is still robust despite macro caution.
Warsh Nomination Overplayed
Everyone is acting like the debasement party is over because Trump tapped Kevin Warsh for Fed chair. Gold, silver, and crypto tanked hard after the announcement, the dollar surged, and the knee-jerk crowd is dumping anything that smells like an inflation hedge.
Warsh has a reputation for "hard money" talk, balance sheet shrinkage, and a hawkish streak on inflation. Investors read it as the Fed turning tougher, the dollar getting stronger, and the whole debasement narrative dying overnight. Add in margin calls from overleveraged metals positions, profit-taking after parabolic rallies, and broader fears around tariffs, policy uncertainty, and a potential Fed pause on cuts, and you get a perfect storm of selling. Everything is connected: metals rout triggers deleveraging, which hits stocks and crypto, which feeds more fear.
But this is not the end of the debasement trade. It is a classic overreaction in a bull market that should still have some legs left. The math does not change just because one guy is nominated to run the Fed.
The US is sitting on a $38+ trillion debt mountain (recently hitting around $38.5–38.6 trillion, up billions every day). Interest costs are exploding, deficits are structural, and neither party shows any real appetite for serious austerity.
No matter how "hard money" Warsh sounds, the Fed is trapped. Shrinking the balance sheet aggressively risks blowing up the economy or spiking yields to levels that make debt service impossible. Political pressure will push back hard, especially with Trump's fiscal plans (think big spending bills) adding fuel to the fire.
The debasement math is simple: massive debt + persistent deficits + no willingness to cut spending = more money printing (or at least liquidity support) over time. Warsh may talk regime change, but he cannot single-handedly override Congress or the White House. Fiscal policy is still driving the bus, and it is headed straight for more currency debasement.
Historically, every time markets bet on a hawkish Fed savior ending the party, the underlying incentives (debt, deficits, political reality) win out. This knee-jerk dollar surge and metals plunge is just that. It will not last unless fiscal policy suddenly flips to surpluses, which nobody serious expects.
Global easing is in the pipeline (expect more Fed cuts). AI productivity gains give cover for dovish moves even under Warsh. Fiscal stimulus remains in play.
Another tailwind is the Institute of Supply Management (ISM) released its latest Manufacturing Purchasing Managers Index (PMI) report, revealing an unexpected surge in the manufacturing sector. The PMI, a composite index derived from five key indicators, came in at 52.6, a substantial leap from the forecasted 48.5. A ISM Manufacturing report over 50 confirms a healthy surge of global liquidity implying that the risk-on / business-cycle expansion is underway. This bodes well for markets. So even though a big jump in the PMI gives the Fed room to not cut rates, global liquidity rules the day. QE comes in many shapes so is often not dependent on rate cuts.
Deflation Doubters
But that does not stop most of the “experts” and mainstream reporters from relying on the Bureau of Labor Statistics (BLS) for CPI inflation data. More than 40% of the CPI inputs are estimated or manipulated using unproven and discredited methods suggesting the government's data is deeply biased. The BLS reported inflation to be 2.7% year-over-year but Truflation reports inflation under 0.9% as of yesterday, having fallen sharply from 2.7% since late last year.
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. Truflation uses more than 14 million daily data points provided by over 40 independent data providers which seems far more reliable. Granted, as I mentioned in a prior report, the necessities which are non-tradable and regulatorily captured (education, healthcare, food, energy, housing) have much higher rates of inflation so cost of living inflation is well above what is reported from both camps.
But why is overall inflation falling if the government is printing like mad? The three-headed hydra: Tariffs, artificial intelligence, and robotics. All are tradable and therefore supremely deflationary. For egs, AMZN employs 1 million robots and 1.5 million humans. They are reportedly looking to replace 500,000 jobs with robots in the coming years, which means they will soon have more robots working at the company than humans. This is highly deflationary.
Meanwhile, a virtuous cycle is created. Companies and people are economically incentivized to use AI more, so there has been exponential growth in AI products and services (ex: Claude Code writing 100% of the code for Claude Cowork, etc). In short, companies and people keep finding new ways to use AI because it saves them time and money, so they use it more every day. The more people use AI, the more data and feedback the companies get, which helps them make the AI much smarter and more powerful. This creates a loop: better AI → more users → even better AI → even more users, making AI grow faster and faster all the time.