09.01.26 - How supply problems in AI can create opportunity

Let's jump right in.

So today is Tuesday, September 1st.

We're ushering in a new month.

And some of the world's top economists gathered in Jackson Hole last week.

Fed Chair Kevin Warsh used that keynote speech, Scott, to make one thing pretty clear here.

It was crystal clear from that speech that he is committed to bringing inflation back to the Fed's long-term 2% target.

And just to give our audience a little bit of context, which I think could be helpful here, Scott, you know, economists have questioned in the past how feasible 2% really is.

And there was some talk maybe, Scott, I don't know if you agree with this, that maybe 3% is the new 2% when it comes to inflation.

I don't know if you'd agree with the way that I put that.

But Warsh is doubling down nonetheless on bringing inflation down to the 2% original Fed target.

Wondering from you, Scott, what are the implications here for interest rates and what we might see at these upcoming fall FOMC meetings? And for investors, could this mean some headwinds or challenges for investors going forward?

Yeah, there's a lot to unpack there.

Anyone hoping for Chairman Warsh that he would grade inflation on a curve and accept 3% as the new 2%, they were basically told to go take a hike in the Tetons.

With the personal consumption expenditure index growth hovering in the mid to high 3% range, he made it clear that 2% is the target.

It's fixed.

Progress so far has been modest, and there is quote-unquote work to do, which means that the next rate move is probably up, not down.

Now, Fidelity's asset allocation research team is projecting inflation above 3% into early 2027 amid a mid-cycle expansion.

So based on that, the Fed funds rate now is likely to stay firmly restricted to try to grind out that last stubborn final mile to 2%.

The market's pricing in at least one quarter percent hike by year end and another one by the end of March 2027.

That's likely to pinch longer duration bonds as real yields push higher.

Elevated discount rates also bring speculative stock valuations back to earth.

So going forward, I expect elevated volatility on every monthly inflation print.

For our managed account clients, real yield can actually be their friend.

High quality investment grade bonds, short to intermediate tips, cash equivalents, these could all be, they can all provide durable, real income ballast.

We don't bet the ranch on one speech.

Let's jump right in.

So today is Tuesday, September 1st.

We're ushering in a new month.

And some of the world's top economists gathered in Jackson Hole last week.

Fed Chair Kevin Warsh used that keynote speech, Scott, to make one thing pretty clear here.

It was crystal clear from that speech that he is committed to bringing inflation back to the Fed's long-term 2% target.

And just to give our audience a little bit of context, which I think could be helpful here, Scott, you know, economists have questioned in the past how feasible 2% really is.

And there was some talk maybe, Scott, I don't know if you agree with this, that maybe 3% is the new 2% when it comes to inflation.

I don't know if you'd agree with the way that I put that.

But Warsh is doubling down nonetheless on bringing inflation down to the 2% original Fed target.

Wondering from you, Scott, what are the implications here for interest rates and what we might see at these upcoming fall FOMC meetings? And for investors, could this mean some headwinds or challenges for investors going forward?

Yeah, there's a lot to unpack there.

Anyone hoping for Chairman Warsh that he would grade inflation on a curve and accept 3% as the new 2%, they were basically told to go take a hike in the Tetons.

With the personal consumption expenditure index growth hovering in the mid to high 3% range, he made it clear that 2% is the target.

It's fixed.

Progress so far has been modest, and there is quote-unquote work to do, which means that the next rate move is probably up, not down.

Now, Fidelity's asset allocation research team is projecting inflation above 3% into early 2027 amid a mid-cycle expansion.

So based on that, the Fed funds rate now is likely to stay firmly restricted to try to grind out that last stubborn final mile to 2%.

The market's pricing in at least one quarter percent hike by year end and another one by the end of March 2027.

That's likely to pinch longer duration bonds as real yields push higher.

Elevated discount rates also bring speculative stock valuations back to earth.

So going forward, I expect elevated volatility on every monthly inflation print.

For our managed account clients, real yield can actually be their friend.

High quality investment grade bonds, short to intermediate tips, cash equivalents, these could all be, they can all provide durable, real income ballast.

We don't bet the ranch on one speech.