Blain’s Morning Porridge July 17^th 2025 – The Stock Market is Not The Economy

“What does this big red button labelled “do not press” do? Let’s find out!”

Powell was sacked and then he wasn’t. The market tumbled but swiftly bounced. It was another day of training markets for disruption. The reality is the ongoing shenanigans are undermining confidence in the Fed ahead of what could be a very testing time for the US economy when Trump policies start to bite.

Do not be fooled by what happened in the US markets yesterday. I’ve read multiple different notes on how the narrative on Trump sacking Fed Head Jay Powell played out yesterday – each contained valuable insights, but I don’t think any captured the whole story. The consensus is yesterday’s market noise was some kind of dress rehearsal to test market reaction: Trump floats the idea, the market crashes, so he rows it back and the market stabilises.

Except its far more complex than just that.

First: Jay Powell is toast. Trump demeans, insults and undermines him at every turn. Powell knows that’s damaging the functioning and credibility of the Fed domestically and globally. He knows a central bank at war with its state can’t function for long without markets arbitraging the inevitable rifts. I would love to be an insider at the Fed meeting to hear how they think they should play it.

The role of the Fed is to deliver stability by demonstrating its credibility. That is untenable if there is a rift. Markets are now waking up to the reality that Powell’s dismissal is underway. They will start to trade it like its effectively happened. Till yesterday the doubts on Trump emasculating the Fed’s independence were theoretical – but now they will become increasingly real.

Trump’s advisors will be telling him the effects of “the president setting Fed policy” will be muted. (As have been the tariff consequences on the economy – thus far!) They will say forcing out Powell slowly will moderate any negative reaction to a public sacking – but that remains an option should he prove stubborn.

There is still the option of appointing Powell’s successor to increase the pressure on the chairman to resign because of the damage two heads would do to the Fed’s credibility. I reckon Powell know his demise is inevitable, and will already be negotiating his exit with honour to minimise the cosmetic damage to the institution.

Second: are the consequences on the dollar and bond markets. What Global markets will think of Trump capturing the Fed will be critical – and likely negative. The competency of the central bank is a key element of a nations Virtuous Sovereign Trinity – a stable currency, a sustainable bond market, and political competency (which includes the central bank.) There will be magnified dollar and Treasury doubts.

The Trump effect on the political competency element has been visible since January. Will yet another shock – sacking Powell – catalyse a bigger reaction, or will it just be another disruptive moment in what’s been 6 months of disruption? Markets are already suffering a degree of PTSD – and are pretty much inured to the sound of yet another Trump Fizz-Bang going off in the trench next to them.

Third: was the stock market was bouncing back even before Trump said Powell’s sacking would not happen. Stocks were taking a short-term view. Sinking because sacking the Fed Head is bound to be immediately destabilising and create a massive degree of angst in bonds and political posturing…..

But, longer-term, the stock market would love to see Jay Powell defenestrated (literally out the window of the renovated Fed Building he might be sacked for cause over.) If rates tumble – and Trump wants 1% – stock prices will anticipate a repeat of the easy-money QE era where interest-rates set too low simply repriced the stock market higher on a relative spread basis. (That’s what stock traders think – remember, they are not bond traders, stock guys are blithe optimists.)

They will be telling each other: what’s not to like about being positioned for bubbliciously fuelled massive dose of financial asset inflation? That was the story of the 2010-23 market.

Fourth: is the coming rumble.

For months economists, talking heads and analysts have been warning of the consequences of Trump’s policies. How the tariff on/off is creating uncertainty. How tariffs will impact the economy – effectively a new sales tax on consumers. How tariffs are inflationary. How the ICE clampdown would tighten labour markets. How the Big Beautiful Bill is inflationary and will impact the bond market.

These are all real things – if they were going to happen, we would be seeing it in the data. Which we have not.

But…. what happens when we do?

A number of my Republican chums have been telling me how it’s foreign exporters that are paying the tariffs, how the additional $40 bln per month of I port duty income is going to slash the deficit, and how it’s non-inflationary. What happens to market confidence when the data proves them wrong?

The reality is we have not seen the inflationary and recessionary impacts. Yet.

There are a host of reasons for that. US firms have tried to absorb the tariff increases themselves – expecting TACO Trump will reverse them when reckons he’s made his point, flexed America’s trade power, and enjoyed the pleasure of fawning global leaders pleading for trade deals in the Oval Office.

There was also enormous inventory build-up ahead of the tariffs, and there are signs many US firms are struggling to sell these goods – because consumers are not spending because they are fearful of jobs, inflation, recession and how they are going to pay their medical bills. (Consumers are not fools – they can sense crisis coming.)

While Trump believes he’s solved any trade crisis with China – at least that’s the impression he wants to give – the reality is US west coast ports remain less busy than we were. Although LA saw record volumes in June – a sudden recovery which probably reflects another round of inventory build-up, but also shortages in AI infrastructure where the goods come from Asia, I also read New York and New Jersey are now the busiest ports in the US, reflecting the realignment away from Asia.

Fifth: is business confidence. I’ve written a few times about how businesses invest long-term. Building a new factory to produce goods for the US market at twice the price the same goods are made in Asia is not a decision to rush into lightly. When the man demanding it happens has less than 3.5-years left in power, it’s easier to say yes, do nothing, and wait and see how the situation changes and becomes more investible.

Yesterday’s market shenanigans over Jay Powell was noise, but listen closely and there are clear signals of potential crisis ahead as global markets continue to refigure the Trump effect. It could still get very messy. If a crisis develops on the back of inflation, recession (together = Stagflation) and a market sell off in October.. and the Fed and Trump are at loggerheads, then crisis potentially becomes catastrophe.

(Chart of the day to follow – but I am very suspicious of the chart-data my uber-expensive Chat-GPT is generating. The data is absolute pants, unreliable and very inaccurate.. am trying to figure out why. I also note that Grok and Chat-GPT use identical language and files to describe how to do it – and give completely different answers!)

Out of time, and back to the day job..

Bill Blain

Author, The Morning Porridge

CEO Windshift Capital

Partner Shard Capital