Hot and cold

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My daughter bought me the most thoughtful gift for my birthday. A few sessions at one of the new steam shower, sauna, and cold bath clubs. Yesterday I tried it out.

First a steam shower, and then from extreme heat I plunged into a 3-degree ice bath where I lay for 3 agonising minutes. It was one of the most intense, uncomfortable, and painful experiences of my life. Somehow it was also invigorating and addictive. I went back 2 more times to experience the cold. My son and I love Wim Hoff’s quote, “The Cold is Righteous.” At 2am this morning I was still coding with my alarm clock set for 6:10am; that is how alive it made me feel. When my alarm went off, I wasn’t so alive, if I am being honest.

So why am I sharing this with you?

There are life lessons from my experience that I think are well expressed through this metaphor of extreme hot and cold. My mother disagrees, by the way. She said, “You could have had a heart attack.”

Just like the body adapts and strengthens through exposure to extremes, so too does the economy—and our mindset—when exposed to cycles of expansion and contraction.

We can't live in the heat forever. Nor can we stay frozen. It's the movement between the two that builds resilience, both in our systems and in ourselves.

If you’re feeling the pressure of inflation or an economic slowdown—perhaps this is the plunge pool after a long overheating cycle. And like in the cold bath, it’s not comfortable; it is all part of a deeper recalibration towards a healthy balance.

In April 2025, President Trump labelled Chairman Powell as "Mr. Too Late" on social media, arguing that Powell was slow to lower interest rates despite what Trump described as favourable economic conditions for such a move.

I share this chart often. The 2-year Treasury yield is the best leading indicator of the Fed Funds Rate. According to this chart, Trump is correct: Powell is behind the curve.

In the next chart you see extremes more in line with my spa temperature metaphor. Here too Chairman Powell is exercising monetary restraint with his current policy. This, after such a lengthy period of excess, is what is needed. Extremes need both ends to be healthy.

The inflation data is what is going to drive policy if the Fed can maintain its independence. Yesterday the NY Fed released its multivariate core trend indicator on PCE inflation, the Fed’s preferred measure, and it is forecasting an uptick in inflation-duh!!

We are far from out of the woods; in fact, we are only getting started. I struggle to see inflation lower a year from now, knowing what I know.

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I can just feel the temperature rising once again with global geopolitical uncertainty. Yesterday Pakistan and India became embroiled in what appears to be a war. I notice how all the leading news media are describing the situation as two nuclear-armed countries going to war. It feels as if every conflict right now has the potential to ignite World War 3. Before, they were called “conflicts.” Yet the VIX has come down below 25%, and the stock market is near all-time highs.

Follow Warren Buffett; don’t listen to me. Load up on some cash.

I am keeping an eye on the REPO market, waiting to see if there is a liquidity crunch in the works. So far, nothing major to report. The Fed was a major buyer in the 10-year Treasury Auction yesterday. Need to keep an eye on that.

The yield steepener trade has been one of my better ideas, and it still has plenty of room to run in my view.

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Gold made a new ATH yesterday.

It is even looking stronger in Yen and Swiss Francs.

Yesterday was a 5 Z-score up day in Gold Dollar. The chart looks messy, but I am leaving it like that so you can see how frequently it is doing 5 sigma up days of late. The average is one every 438 days, but it seems like we are having one every 5 days lately.

The Turkish Lira made a new ATL.

Finally, the Taiwan Dollar had a pretty strong pullback against the EUR and USD after its POP the day before.

Finally,

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