What’s Behind the Growth of Tax Aware Strategies in the U.S.?
Rob Poole, CFA, Co-Head Equity Strategies, Head of Fundamental Equity Research
Is the Debasement Trade a Vote of No Confidence in the Federal Reserve?
Ben Hunt, Co-founder, President Perscient
Geoff Phipps, CFA, Portfolio Manager and Trading Strategist PICTON Investments
Credibility is a strange kind of currency. You cannot see it on a balance sheet, yet everyone in a market knows the moment it is spent. This week, PICTON Investments’ Geoff Phipps sat down with Ben Hunt of Perscientto work through a question that sits at the intersection of two stories: a new Federal Reserve chair still auditioning for the market's trust, and a structural trade in gold, steepeners, and the dollar that refuses to stay dead. Ben opens with what the data says about credibility itself. Geoff picks up from there, connecting it to the forces still driving the debasement trade and the pressure building underneath the artificial intelligence boom.
To paraphrase Supreme Court Justice Potter Stewart, I can't define credibility, but I know it when I see it. And Kevin Warsh ain't got it. Yet, anyway. This is not a matter of opinion. At Perscient, we track fuzzy but consequential market concepts, things like "credibility," "oversold," or "priced in," using large language models as probabilistic semantic calculators, allowing apples-to-apples comparisons of market-moving narratives over time.
By that measure, Warsh's starting position was never as damaged as Jerome Powell's two years ago, when the Federal Reserve cut interest rates in a manner widely read as politically timed ahead of the 2024 election, or last summer, when President Trump's aggressive investigations into Powell and several Federal Reserve governors did lasting damage to the institution's standing. Still, the market's reaction to Warsh's July 29 press conference following the Federal Open Market Committee meeting was a supernova in narrative terms. The Federal Reserve held rates steady, and Warsh sounded as hawkish as Ben Bernanke did in 2009. Confidence in Warsh's inflation-fighting resolve turned, almost overnight, into a wave of stories arguing the new boss looks exactly like the old one.
Because credibility is how a chair gets the market to do the work for them, Warsh had little choice but to double down. His hawkish tone at Jackson Hole, and the market's expectation of a rate hike this September even after a relatively benign Consumer Price Index report, trace back to that one press conference. What could have easily been a one-and-done move in July is now likely a rate hike cycle of some sort. Once credibility is lost, it takes roughly twice the effort to rebuild.
Picking up on Ben's framework, I want to turn to the debasement trade itself, the underlying growth pressures building in AI-driven credit markets, and what it would take for the Federal Reserve and Treasury Department to actually fail the credibility test Ben lays out above.
Earlier this year, consensus positioning across short dollar, long yield curve steepener, and long gold briefly came undone amid the oil price shock tied to the conflict with Iran, prompting investors to ask if the trade was over. Our view at the time, which remains the case, was that the trade was on pause. Deep structural trades like this one rarely move in a straight line, and the pauses tend to get mistaken for the ending.
The structural trends underneath the trade remain intact, in my view: fiscal dominance under worsening debt-service math, reserve diversification away from the U.S. dollar, and more insular policy that could favor repatriation of capital. All of this is unfolding just as the stakes of a real credibility test are mounting.
I would point to a pressure point building in credit markets. A reverse crowding out is emerging, where issuance from hyperscale technology companies competes directly with Treasury Department supply, pushing government borrowing costs higher. The AI credit channel has real potential to test the limits of market liquidity and expose the plumbing, including newer structures financing artificial intelligence infrastructure. Layer on the inflationary effects of the conflict in the Middle East, and the real test of the Federal Reserve's resolve comes once the growth hit lands, unevenly, masking its ultimate size until it is well underway.
These catalysts need not play out in their most severe form to matter, but if they do, the required response would be substantial: large-scale liquidity injections, potential credit backstops, or direct government involvement in financing data centers. Should the Federal Reserve and Treasury Department fail the credibility test Ben describes, I believe the range of asset-price outcomes is far wider than what is currently priced.
The ultimate solutions lend themselves to debasement and financial repression, but that liquidity flood does not arrive until the fear is palpable. And the written put markets have long relied on carries less force by the time it is called upon, if credibility is already walking wounded.
So, is the debasement trade a vote of no confidence in the Federal Reserve? Between Ben's read on credibility and my own read on the structural forces still in motion, the answer looks less like a single verdict and more like a hedge against the possibility that confidence, once spent, does not come back on schedule.
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Rob Poole, CFA, Co-Head Equity Strategies, Head of Fundamental Equity Research
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