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Chancellor Friedrich Merz took power 16 months ago.

President Donald Trump shared a lighthearted moment with hunting enthusiasts while discussing his new executive order expanding access to hunting and fishing. Trump joked about lead ammunition, admitting, “I don’t know what the hell that means,” before assuring the crowd, “You wanted it, and I’m here for you.”

The Fed Rate-Hike Won't Fix The Inflation It Targets

Authored by Lance Roberts via RealInvestmentAdvice.com,

The Fed did what the bond market dared it to do. This past week, in a unanimous vote, the FOMC raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, the first Fed rate hike since 2023. The stated reason was “price stability.” Yet this is a Fed whose own chairman has spent the past year insisting that real growth does not cause inflation, and that the drivers of this one sit largely outside the central bank’s reach. As we argued in prior Bull Bear Reports on the debt-and-inflation problem, that tension is not a footnote; it is the entire story of the Fed rate hike, and something worth exploring more deeply.

Make no mistake, it was the bond market that forced the issue. Such is interesting when you consider that Kevin Warsh wants the market to create the signal. Well, he got what he wished for. The 10-year Treasury yield pushed to roughly 5.01% around Wednesday’s decision, a level not seen in 19 years, while the 30-year cleared 5.35%. In other words, the market’s message was clear: “Raise rates, or we will.”

What The Fed Rate Hike Actually Does

However, what gets lost in transmission is what the Fed is actually trying to achieve through interest rate policy. The mechanism behind rate hikes or cuts is a demand story, nothing more. Raising the policy rate raises the cost of money across the system. Credit-financed demand cools first, mortgages, auto loans, capex, anything that lives or dies on the cost of borrowing. As that demand softens, the economy loses some of its power to bid prices higher, and the pace of increase eases. “Price stability,” in the Fed’s own framing, is really “expectations” stability.

Now, notice what the Fed’s tool never touches, and this was mentioned by Warsh on Wednesday. A higher Fed funds rate does not drill a well, end a war, or reopen the Strait of Hormuz. The Fed rate hike works on one side of the ledger, and one side only: the demand side. Such is the design, and such is also the limit. When the inflation in front of you is a supply problem, a demand lever pulls on the wrong rope.

What Warsh Means By “The Fed Can’t Fix Prices”

However, this is where most of the mainstream commentary gets sloppy. The Warsh school separates two things that the word “inflation” quietly blends together.

1. There are relative prices, set in the real economy by supply and demand for actual goods, and then
2. There is the monetary unit, the purchasing power of the dollar itself.

An iPhone gets cheaper because of globalized production. Oil prices rise because of a war that threatens supply lines. No policy rate produces either outcome.

When Warsh implies the Fed cannot fix prices, the defensible version of that claim is narrow and correct. Monetary policy cannot repair a supply-driven, relative-price shock. It can only compress demand until something breaks. Milton Friedman’s line, that inflation is “always and everywhere a monetary phenomenon,” is usually quoted, incorrectly, to argue the opposite. However, read that carefully, because it makes Warsh’s point. Friedman described the slow erosion of the currency over the years (driven by a general rise in inflation amid economic growth), not the price of gasoline during a Gulf conflict. The Fed owns the monetary unit, but does not own the oil market.

Look at the composition of the number the Fed is fighting.

Headline ran 3.4% in August, but energy alone ran 16.9%. Strip the war out, and the overheating story gets much harder to tell. That is not a demand economy running too hot. That is a supply line on fire.

Then Why Hike Into A Supply Shock?

Fair objection. If the Fed cannot produce a barrel of oil, the Fed rate hike looks like “theater.” It is not, and the reason is CREDIBILITY. A central bank tightens into a supply shock for three defensible reasons, none of which involve lowering the price of crude.

1. To keep inflation “expectations” anchored, so a one-off energy spike does not get built into wages and contracts and turn into the self-sustaining spiral of the 1970s.
2. To protect the institution’s word after the “transitory” humiliation of 2021, when the Fed looked through a shock and watched it metastasize.
3. Because the cost of being wrong twice dwarfs the cost of over-tightening once.

The dot plot shows the committee has made that trade. Sixteen of eighteen officials now see the possibility of at least one more hike this year, and four pencil in two.

“Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal.” – FOMC statement, September 16, 2026

Read that quote once again. The committee expressly said that it can steer prices with rates. However, history tells us more precisely that the Fed can reliably steer demand only. Those are not the same claim. Fighting a supply shock with a demand tool is the textbook recipe for stagflation, slower growth, and higher unemployment without curing the thing that lit the fire. Such is the box Warsh is in, the same Volcker-versus-Burns dilemma, now his to own.

Here is a clearer way to see the potential danger that Warsh is walking into. The same dot plot that pins the neutral rate at 3.1% now has the funds rate at 3.875% and climbing toward a 4.1% median by year-end. Once you strip away the language, the Fed is already about 90 basis points into restrictive territory, with more to come, even as Warsh insists conditions are not “broadly restrictive.”

That setup leaves the Fed with absolutely no margin for error. In the current environment, the Fed is hiking rates to offset an oil price spike. If energy costs continue to weigh on growth and the Fed continues to tighten, it will accelerate the deterioration. If oil reverses, the inflation impulse fades quickly, and the Fed’s hikes accelerate the economic bite. Both roads end at the same address, a Fed caught in a policy mistake, scrambling to fix the overshoot.

What Usually Happens To Stocks After A Hike, And Why This Time Is Different

The bulls have a comforting statistic ready for this week, and it is a real one. Going back to the late 1980s, the S&P 500 has slipped only modestly immediately after a first Fed rate hike, roughly 2% over the first three months, then recovered to average gains of nearly 9% over the following year, according to Goldman Sachs. LPL Financial puts the average 12-month gain at 6.7%, with a median of 10.7%. The tidy conclusion is that rate hikes are buying opportunities.

However, as is always the case, beware of “averages,” which in this case may well be lying to you. The reason I say that is due to the composition. The Fed almost always hikes into a strong, demand-driven expansion. It rarely hikes into a supply shock. When it has, the record is far uglier, and the damage tends to arrive late, once the energy spike feeds inflation and the tightening starts to bite.

After the 1973 oil embargo, the S&P fell 11% in a month and 41% over the next year. Another, more recent example, was when the Fed tightened amid the energy-and-inflation shock of 2022. During that period, the index lost roughly 19% for the year and remained underwater well past 12 months. Every “hikes are bullish” study carves 2022 out as the exception. Today, it is most likely not the exception, but the template.

One thing that matters is the pace of the Fed rate hikes. Charles Schwab’s strategists found that the S&P returned 10.5% over the year following slow tightening cycles and lost 3.6% after rapid ones. So what should you actually expect over the next year, hiking into a war-driven supply shock with the 10-year near 5%? Our read sits below. It is a judgment anchored in that history, not a backtest.

In the current market, the leadership is not subtle. When the Fed hikes amid an energy shock, money tends to flow to where inflation is a benefit rather than a hindrance. For example, in 2022, as shown below, energy led the market up by about 48%. This suggests that investors, today, like then, should favor energy, materials, and defensives with real pricing power, as well as staples and health care. On the other side, underweight long-duration assets such as technology and communication services, as well as rate-sensitive discretionary and real estate names. However, there is always a caveat. If oil breaks and the shock fades, that map inverts, and today’s laggards lead the way back.

Such is the danger of leaning on a historical average built almost entirely on the wrong kind of hike.

What This Means For Markets Over The Next Few Months, And How To Navigate It

So how do you navigate it? Rates are “higher for longer,” and the committee has told you plainly it is willing to go again. The 30-year above 5.35% and the 10-year near 5.01% raise the bar that every equity, especially long-duration growth, has to clear to justify its multiple.

The forecasters are already marking that reality. Ed Yardeni cut his year-end S&P 500 target to 7,900 from 8,400 on the decision, flagging the risk of a downturn over the next three to six months as yields climb on energy. We would take the warning seriously without treating it as gospel.

Let’s focus on the bond market, which is the harder call right now, and the argument cuts both ways.

The bull case is a good one.

“The term premium has expanded to levels that historically pay investors to own duration, and a hike that slows the economy is the classic tailwind for long Treasuries. If Warsh restores “credibility” and growth cools, the long end rallies, and this past week’s high yields will look like a gift.”

The bear case, however, also has teeth.

“The 30-year sits at a 19-year high for a reason: relentless issuance against a $40 trillion debt, layered on top of supply-driven inflation. Rate hikes can not fix that. That tail does not disappear either just because the Fed moved a quarter point. So, this argues that investors should take exposure at the point where the term premium is best paid for the risk. That is in the belly of the curve, with 5-7 year durations.”

Crucially, none of this argues for abandoning equities. It argues for respecting a market regime in which the risk-free rate finally competes with everything else. It is an environment where the biggest driver of “price stability,” the Fed cited, is a war it can’t control. The deeper problem lies one level down. The deficits and debt that we repeatedly flagged are the real long-run engine of price stability. Monetary policy sits downstream of all of it.

The Fed can raise the price of money. It cannot lower the price of a war. Size the portfolio for the difference.

Tyler Durden Sun, 09/20/2026 - 11:30

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The "Face/Off" actor, 62, and his wife hit the opening night celebration for the Lucas Museum of Narrative Art in Los Angeles on Saturday.

The "Face/Off" actor, 62, and his wife, 31, hit the opening night celebration for the Lucas Museum of Narrative Art in Los Angeles on Saturday.

Bessent And He Lifeng Open High-Stakes Trade Talks Ahead Of Trump-Xi Summit

Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer are meeting Chinese Vice Premier He Lifeng at JPMorgan Chase's Manhattan headquarters on Sunday for a critical round of trade negotiations. The all-day session marks the final ministerial push before President Donald Trump hosts Chinese President Xi Jinping in Washington beginning September 24.

JPMorgan is not involved in the negotiations, though Bessent previously invited CEO Jamie Dimon to speak at a Treasury-hosted G20 finance leaders meeting in Asheville.

This negotiating channel previously engineered the Busan truce, which capped bilateral duties near 20 percent after reciprocal tariffs spiked into triple digits. The administration has since rebuilt its tariff structure under alternative statutes, while broader excess-capacity tariffs remain paused until after this week's summit. The existing truce expires on November 10, adding urgency for both sides.

The Core Negotiating Agenda

Three primary issues dominate the current talks, alongside geopolitical tensions over Taiwan and Iranian oil:

• Rare Earths and Critical Minerals: Beijing committed in Busan to resume shipments of critical materials, but a senior U.S. official noted that China's performance has fallen short. Disruptions to these supplies significantly impact global manufacturing and technology. Beijing holds the leverage of offering more export licenses but has yet to restore pre-restriction volumes.
• Artificial Intelligence: Negotiations will cover both open-weight and proprietary closed-weight AI models. Low-cost Chinese open-weight systems are increasingly adopted by U.S. developers, prompting Washington to push for bilateral guardrails against misuse by non-state actors while avoiding a complete bifurcation of the tech ecosystems.
• Unresolved Trade Commitments: Negotiators are revisiting items left hanging from Trump's May visit to Beijing. This includes efforts to reduce tariffs on non-sensitive goods, finalize Chinese agricultural purchases, and address proposed U.S. tariffs linked to industrial overcapacity and forced-labor concerns.

Broader geopolitical issues continue to shadow the economic track. The conflict involving Iran and its impact on energy supplies has emerged as an unexpected major pressure point in the talks. Additionally, Washington continues to monitor the flow of fentanyl precursor chemicals from China, which will likely feature heavily in the main summit.

Expectations and Market Impact

The likelier outcome is diplomatic management rather than a major structural pact. Both administrations have a strong interest in avoiding a renewed escalation of trade tensions and preventing the Busan framework from falling apart before November.

Markets will look for any formal extension of the November 10 date, verified increases in magnet export permits, and whether agreements on AI guardrails contain binding terms.

Tyler Durden Sun, 09/20/2026 - 11:05

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Trump’s warning comes as the US-Iran conflict enters its seventh month.

Good Intentions Paved The Road To The 2008 Financial Crisis

Authored by Paul Mueller via The Daily Economy,

This week marks the eighteenth anniversary of the failure of Lehman Brothers, a key event of the 2008 global financial crisis (GFC). Lehman's failure and the GFC more broadly were dramatic economic events. Lehman Brothers was the largest bankruptcy in US history to date. The global financial crisis gave rise to the Great Recession. The stock market fell by more than 50 percent, the economy contracted by 4.3 percent, unemployment rose from 4.7 percent to 10 percent, and the subsequent decade of US economic growth was abnormally anemic.

Many myths about Lehman's failure and about the 2008 global financial crisis continue to dominate public discourse. Popular consensus still places the blame primarily on deregulation, Wall Street greed, and reckless financial engineering. And many anecdotes inform their perspective.

Mortgage fraud was common and egregious, especially in the final few years of the housing frenzy (2004-2007). No-doc loans, NINJA loans, and liar loans were far too common - and most people were not held accountable for their complicity. Accusations of fraud by large banks and credit rating agencies, though, were largely overstated. Other than a couple big mortgage lenders engaged in systemic fraud (Countrywide) or truly reckless lending (Golden West), most financial institutions operated on the right side of the law.

The real driver of the GFC was pervasive bad incentives created by years of misregulation. Consider, for example, the Federal Reserve's Recourse Rule. This regulated how much capital banks had to hold against different classes of assets, and strongly favored mortgage-backed securities (MBS). Not surprisingly, banks shifted their portfolios to hold more MBS - one of the major asset classes to blow up in 2008. Regulation created this herd-like behavior, leading to overconcentration in a certain asset and greater systemic fragility.

Simultaneously, more than a decade of regulatory pressure forced Fannie Mae and Freddie Mac to lower their underwriting standards - a shift that soon infected the entire industry. The Community Reinvestment Act, federal agencies, and the Department of Housing and Urban Development all pushed for reduced mortgage underwriting standards. More people were able to buy a home - even if they couldn't afford it.

Peter Wallison and Edward Pinto document this regulatory transformation. Far from a market-driven "race to the bottom" by private lenders chasing short-term profit, housing regulators in the early 1990s viewed traditional underwriting standards as discriminatory barriers to homeownership. Using the 1992 Housing and Community Development Act, the Department of Housing and Urban Development mandated affordable-housing quotas for Fannie Mae and Freddie Mac - requiring them to allocate an ever-increasing share of their support to low- and moderate-income borrowers, starting at 30 percent in 1992 and climbing to 56 percent by 2008.

To achieve these goals, Fannie and Freddie systematically dismantled traditional underwriting guidelines. The conventional mortgage market consisted of 30-year fixed-rate loans requiring 20 percent down payments, fully documented borrower income, and high credit scores. These mortgages were remarkably stable and had very low levels of defaults.

But by the mid-2000s, this underwriting standard had been replaced by loans with less than 10 percent down payments, adjustable interest rates, and lower FICO requirements. As Pinto later argued in a report to the Financial Crisis Inquiry Commission, roughly 27 million US mortgages - half of the entire market in 2008 - were high-risk, non-traditional loans, with government-backed agencies holding or guaranteeing the vast majority of them.

The otherwise laudable goal of increasing access and affordability led to higher housing prices and degraded the quality of mortgage finance, which then made its way onto bank balance sheets. Misregulation didn't stop once the crisis began - the same instinct to override market signals with discretionary judgment, which had already reshaped underwriting standards for a decade, next reshaped the government's response to the panic itself.

Government interventions meant to "fix" the market made things worse. Lehman's failure was certainly a blow to the market, but not as much as some people make it out to be. The S&P finished fractionally higher the Friday after Lehman's failure than it had the Friday before - most of the stock market decline came weeks later in October following further government interventions.

Two previous government actions that made Lehman's bankruptcy more disruptive than it needed to be. In March 2008, government officials brokered a bailout for Bear Stearns. This created a moral hazard in which Lehman executives rejected acquisition bids from interested investors and delayed deleveraging their mortgage portfolios, likely in the expectation that they would receive a deal, too. Federal officials' last-minute attempt to rescue Lehman left the firm unprepared for its complex Chapter 11, resulting in a chaotic bankruptcy that destroyed wealth and froze counterparties worldwide.

Lehman's failure highlights the broader problem in 2008: discretionary and reactionary government actions meant to dampen the GFC unintentionally made it worse. They created uncertainty and panic. Consider how the Troubled Asset Relief Program (TARP) required all major banks to take bailout money even if they didn't need it. Treasury Secretary Paulson didn't want investors and lenders to identify and dump the weakest banks.

Yet this badly misjudged the market. Most lenders and investors had a pretty good sense of which banks were in trouble already. Forcing healthy institutions to take TARP funds signaled that contagion was deeper and more systemic than feared, accelerating capital flight from the banking sector.

Government officials also created perverse incentives by bailing out some firms early while letting others fail. If there is one thing worse for markets than bad news, it is uncertainty. And the Bush administration created deep market paralysis with its inconsistent, and often panicked, interventions in financial markets in 2008. Ordinary Americans paid the price then and are still paying the price today, in the form of greater government distortions of financial markets.

The Federal Reserve still holds nearly $2 trillion of MBS, an asset class it bought, and continued to buy, due to the "emergency" 18 years ago. More problematic, though, is that the GFC shook people's confidence in markets and in a free economy. The drive for broader government assistance programs on both sides of the political aisle has been fomented in part by the calamity of the GFC. Subsequent asset bubbles fueled popular cynicism about cronyism in the financial system.

The institutional memory from 2008 was on display in 2020 and 2021, when both the Federal Reserve and two different administrations turned on spigots of government spending, lending, and economic stimulus - resulting in the elevated inflation we face today. Nearly a quarter of the dollar's value has vanished since 2019.

If there is one thing we should learn from the 2008 GFC, it is that discretionary government interventions tend to generate negative unintended consequences. Even more importantly, we should view calls for more regulation, whether of cryptocurrency, stablecoins, energy production, or data center construction, with a skeptical eye.

Individual rules that may seem to make sense on paper can create perverse incentives, especially when they come stacked on top of other regulations. Unintended regulatory synergies generate herd-like behavior. Precisely the opposite is required for the decentralized experimentation that drives economic resilience.

Tyler Durden Sun, 09/20/2026 - 10:30

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Diana's brother sat down with BBC to promote his bombshell book about his late sister, "Swan Song: Diana, My Sister," which hits bookshelves Tuesday.