This past week was a historic week. Not only did we get a new Fed share nominee, we also had a historic implosion in the precious metals, especially silver, down 30% in one day. So I think these two are linked but just by a little bit. So today let's talk about two things. First off, let's talk about who a future chair is. And secondly, let's talk about the precious metals.

Starting with Kevin Walsh. So, over the past few months, it's been a roller coaster when it comes to the Fed chair race. Now, for most part, Kevin Hassett was in the lead, and he was also who I thought would be Fed Chair. Now, Kevin Hassett was someone who had been with the president for a decade. He was the president's economist, chair of economic advisors during the president's first term and right now he is president of another high policymaking role. He's been the president's loyal economist for a long time, so it stood to reason that he would be the president's future nominee, was someone the president could trust to try to cut rates as much as possible. But a couple weeks ago, the president went out of his way at a press conference to make the comment that it's probably not going to be Hassett. Now, after in retrospect, it seems like the kerfuffle with the criminal allegations against the Fed may have made some Republican senators less willing to confirm nominees that are perceived to be too loyal to the president. So, that might have hurt him.

So after Kevin Hassett was out of the picture, the race came down to either Rick Reer, CIO at BlackRock, or Kevin Walsh, who was formerly a governor at the Fed during the great financial crisis and almost nominated by the president to be Fed Chair during his first term. Now, I've written about both of these guys, and it to me it was kind of a neck-to-neck race. I wasn't really sure what would happen. Now Rick Reer, I thought was someone who was actually very smart, very thoughtful, had a good understanding of how the financial system worked today. But against him was that he previously had donated to Democrats and doesn't have a really much of a relationship with the president and also even donated to Nikki Haley in the past, who also just not friends with the president. So it was going to be difficult for the person to trust, entrust such an important job to this person who had such no clear ties to him, even though maybe he's from a policy standpoint maybe on the same page.

Now Kevin Walsh has always been someone who I thought was bizarre that the president would like him and I think many people feel this way as well. The reason being that Kevin Walsh has been a hawk his entire career. Now he has been governor in the past and we can look from his previous statements, declassified meeting transcripts and also he's been in public life just in podcast and lectures and op-eds and so forth for a long time and it's really clear who he is. He is a ginormous hawk, always talking about the Fed's balance sheet too big and thinking that this would cause inflation and whatnot. Now, Anna Wong from Bloomberg Economics had a really good chart overlaying the unemployment rate, inflation rate, and some of comments from Kevin Walsh during the great financial crisis. Now, heading into the GFC, Kevin Walsh was like, "Financial system totally okay, guys. But by the way, I'm worried about inflation." And in retrospect, obviously, the financial system was not totally okay. But everyone made that mistake, right? Ben Bernanke made that mistake. I think Ben Bernanke did a really good job as Fed chair, right? Totally great crisis fighter. So after the great financial crisis, unemployment rate close to 10%, we were in the beginning of the great recession. Kevin Walsh, smart guy, obviously he updated his priorities, right? He learned, right? So well actually no. Even with the unemployment rate at multi-decade highs, Kevin Walsh was like, you know, I'm kind of concerned about inflation. So that was a call that was wrong, right? It seems like his primary driver of his concern over inflation over the past decade was that the Fed's balance sheet, and that was also a totally reasonable stance, right? There were people who had a monetarist view of the world saying that hey Fed expanding its balance sheet, printing a lot of money, increasing money supply, we're going to have a lot of inflation, right? And at that time gold prices were surging. There was legitimate concern from very many smart people. Okay. Um, but after a decade of this now we can see that that's actually not how the world works. Did Kevin update his mental model? No. No. He's still saying the exact same thing. So he's someone who's consistently hawkish and someone who also is not able to update mental models. Though that's kind of concerning. But for whatever reason, you know, president likes him. I think over the past few months he's also moderated his stance. Has been talking about we got a productivity America so we're going to be able to cut rates and so forth, right, saying the right things. But I think it's also very important to note that his father-in-law is Mr. Louder of Estee Lauder fame, billionaire and also someone who has been a big political donor to the president to the Republican party for a long time. And also Walsh is extremely well-connected. He knows a lot of influential people and these influential people over the past few months all came to bat for him. So there's a very, very wide campaign behind the scenes where we had all these important people that you would know, you would recognize, come and just give put in a good word for Kevin Walsh. In contrast, you know, Kevin Hassett did not have the same network. Um, also, you know, perceived to be difficult to confirm. Rick Reer didn't seem to campaign as hard. So Kevin Walsh definitely ran a very good campaign about this. And upon his nomination, you can see on Twitter, you had all these people congratulating him, right? So you got Muhammad Alan, you got Jason Ferman, you got even Mark Carney, prime minister of Canada, all these people pouring out congratulating Kevin Walsh, great guy. These are all people in his network. He is super well-connected and all these people pulled for him and that seemed to have pushed him across the finish line.

So what does a chair Walsh Fed mean? So, first and foremost, he's finally going to be able to complete his dream of shrinking the Fed's balance sheet. You know, there's a lot of people saying that this will never happen. This is ridiculous. You know, Trump loves the stock market and so forth. So, I think those people are going to be wrong. Uh, the reason I think they're wrong is that a smaller Fed balance sheet is actually a consensus position in the Trump administration. Secretary Mnuchin believes in this. Governor Bowman believes in this. Governor Mian believes in this. This is something they want to do and this is something they can do. This is not interest rate policy. It's not a Fed independence issue. So I think we have enough heft to do this. Question is why they want to. I don't know. Now the process doing this requires a lot of groundwork because it's going to be a fundamental transformation in how policy is implemented. So you're going to have to have a lot of banking deregulation which they're on to doing and you're going to have probably some volatility in the markets unless you do it very, very slowly. Now this is in my view probably going to be risk negative, depending on how smooth the banking regulations go forth. So I know the thing is Kevin Walsh openly tells you that he's going to, he thinks that the strength in the balance sheet it's going to be a tightening impact and that's part of reason why he thinks he can cut rates. So, it's all out in the open. This is really what they want to do. And I'll probably talk more about or write about this this week about how I think this could happen and what the implications were. But overall, I think this is risk negative. Now, the market took a look at this nomination, surprised a bit. I guess this guy is like the harsh person of all the president's candidates. And so, you had an immediate reaction where you had the curve steepen a bit. So more rate cuts, but you know the longer end sells off a bit probably because of balance sheet thing. Uh, and also you have the dollar knee-jerk strengthening.

And that leads us to our second topic, the total implosion in the precious metals market. So listen, we've been talking about the precious metals, silver in particular, for the past few weeks. Now silver, as I've noted over and over again, is the original meme coin. Retail speculators love silver, right? Um, and silver over the past few decades, you can see that periodically it just surges to the moon and then it implodes. Happened in the 1980s, happened in the 2010s. And I know this because I was in silver at that time, you know, making a lot of money. And then I remember distinctly one Sunday evening a GlobeEx opened and it just all came crashing down and there was an attempt to recapture the highs, 50 at that time, and then it just lost that and then just totally imploded. It was a painful experience. So looking at this extreme, extreme surges in silver again, I instinctively knew that this is going to happen again. This is just how markets work. It's just a new generation understanding and learning about speculation. So over earlier in the week I posted this that guys I'm going to go and sell some physical silver. I was already a lot of my paper silver and looking at prices surge, I think at that day was like 110, 115. I was like this is totally ridiculous. And then I was looking at the silver bars that I had. Why am I holding this? You know, if you really think about it, I mean, what am I using this stuff for? Honestly, it's on the ground in front of some wires so that my robot vacuum will not be chomping on the wires. Sometimes I use silver bars to hammer something. I've watched some convincing footage that says it's very effective against werewolves, but other than that, you know, this stuff is this stuff is just it's just a huge rock, right?

So, so what do I what am I doing with this in some weird bizarre scenario where we actually have a MadMax world? This is totally not useful. What would be useful with something like a technology for example, right? If we live in a MadMax world, you we're not going to have any more computers or cell phones. And this stuff, this stuff is really, really difficult to make. It takes hundreds of vendors, a lot of engineers. It's basically the pinnacle of our technological civilization. And if in the MadMax world, you won't be able to make these texts up anymore. So you would have these useful things, not this rock. And even if you were, you know, thinking about having a sort of value, silver isn't actually that good for that. Uh, because it's too heavy. And if you, you know, a 100 bar, it's like 10 grand, but it's heavy. You can't really move it around. You would, gold, for example, would be much, much better for that. So, I went and took my silver bar and to the local dealer and he offered me, you know, actually notably below spot. Nice, like 15, 20 below spot, but I took it anyway. And then I posted and I came back and I saw how viral my post had gone. I saw the comments and I'm like, "Holy, I'm not bearish enough. All these these low information investors just kind of clamoring in." And so the next day I went to try to sell another bar. And to my surprise, the dealer actually told me that he's not buying. He was not buying. Too many people selling is the foundry that he sells to also can't pay him for like two months. His vault is full. So he he's not. So I have to actually go to a couple other dealers to try to find people to to um to offload my my bars. And I'll also note that when I was lining up in line to try to sell silver, there's a long line of people selling and basically all boomers with their you know who've been stacking for some time it seems. Uh, in the window to buy silver, only one person, a zoomer. So I was like, yeah, this is just part of learning, I guess.

So uh, in the internet I noticed that people were saying, guys, it's not the top, it's not the top. You know why? It's because at the top, everyone is climbing to buy. Everyone's trying to sell. So obviously it's not the top. You know, I thought about that for a little bit. But then guys, if I want to sell silver and I can't even sell, that can't be that can't be risk positive, right? And all sorts of other just misinformation like that. For example, there's some people saying that I'm actually being able to my dealer is buying silver above spot. That's just so stupid, guys. That's totally not what how a dealer works. A dealer works same thing as a dealer in the treasuries market. For example, let's say that spot is 100. He's going to buy below spot and sell above spot. He makes that spread. That's how he makes his money. Buying low, selling high, you know, bid ask, bid offer and so forth, right? That's how dealers work. So, um, so to me, this is just totally totally insane. Now, I remember all these people coming out and I mean, don't you get it? Uh, fiat is going to zero. Don't you get it? You know, the Chinese are buying. Don't you get it? Right. Uh, this stuff the banks are short. We're going to blow them up and so forth. Now, what these guys don't get, though, is that back in the 2010s, people said the exact same thing. I'm not even joking. They said the exact same thing as everyone was buying into 50. They said it on the way to 50 and they said it on the way down to 15. Uh, what's even more surprising is that when I look back to the 1980s looking into when the Hunts brothers were trying to squeeze silver, uh, same thing actually. Inflation is high, deficits are large. Guys, this is uh, you know, basically your debasement trade. And they said that all the way up to 50 and all the way down to $7. So this stuff, guys, this just happens over and over again. All this is is speculation, momentum, leverage, so forth. Highly, highly unstable. And so when you have a very, very unstable thing, you just have need a little push to overwhelm, to tip over the apple cart. And that's what Kevin W did. You just hawk comes in, uh, dollar strengthens, not hugely, but you know, marketly, but then that that seems to unravel everything. You got, uh, when volatility picks up, somebody sells, markets over lever, other people have to sell, and then you have these people who are, you know, managed according to volatility, volatility spikes, they have to sell. You got CTAs looking at momentum, they have to sell, everyone sells, and then it becomes really, really disorderly, which is exactly what happened. Down, uh, 30% a day, that that is one for the history books. It's, it's really, really shocking to me how badly this this played out. Um, but also how much, uh, leverage there was in their system.

Now, as an aside though, I would also note that, uh, having silver, some people were saying like hundreds of dollars, that's that's never going to happen. Uh, it's not going to happen. Uh, because silver is is different from, you know, this other crap people speculating, right? Silver is actually an industrial metal. Uh, stuff like meme coins, dog coins, stuff like that, you can go and push that as high as you want. Nobody cares. But if you, but silver is something that has to do with, you know, industrial policy, national security, stuff like that. So the government is not going to let speculators squeeze it to to really hide because it actually impacts a lot of important interest groups. And so in the 1980s, you have all these people who basically gotten together and to rig the game. So that's over, imploded. Uh, huge margin hikes, of course, uh, also letting only letting people sell, not buy, and so forth. So, um, I mean, if you want to push something higher, gold in my view is something that could go higher. Uh, these industrial models, you're fighting political economy. Um, but gold, of course, also huge, huge dip, 10% down. Now, I'm not as negative about gold. I think gold actually, I think we could still have higher highs this year. It seems like there's a lot of things going on. Similar dynamics again, not as levered, and also a much stronger demand base. You actually have, for example, central banks or other people who are, you know, a little bit more conservative in their views buying gold. Now, you will not have central banks buy silver. That that's just not not what they buy. Um, so that, I, I think that, uh, my best guess for silver is that we kind of try to push up, maybe I don't try to touch 100 or something like that, probably sales, and then it'd be the end, uh, until again, looking at the silver graph, uh, a few decades. Uh, gold though, I, I'm much more positive about, not not as worried about that. So, one thing to note is that that's really, really in Gat's favor is that we do have real geopolitical risk heating up right now. So, uh, a carrier, carriers have, a carrier has entered the Middle East last week, and it does seem like they're going to try to do something over there. And so that that's going to be, uh, now, this is probably not going to be Venezuela. Again, president has been very calculated in his use of military force. By the way, this is not at all mega. Um, but he, you know, this, these calculations are are difficult to make. You have huge amounts of uncertainty in geopolitics. A lot of things that, you know, are difficult to predict, and we don't know that. We don't know. So, it could be very, very bad, and that could help gold. Well, in any case, totally historic week. Um, all right. I'll talk to you guys next week.