Warsh Must Choose The Dollar Or The Bond Market

3/5/2026 10:31:58 PM	short term sharp up	5 days later	+1.32%	+1.97%

3/5/2026 10:31:58 PM	short term sharp up	5 days later	-4.02%	-6.02%

3/5/2026 10:31:58 PM	short term cautious down	5 days later	+1.81%	-0.91%

We are one week out from the first Fed meeting led by Kevin Worsh. The curve was pricing in rate cuts, now it's pricing in rate hikes. How will this pan out?

Felix

Luke Gromen

Next week is a big card flop. Worsh will have to show his cards. There's a consensus he'll be hawkish, but he co-authored an op-ed in 2018 begging the Fed to stop hiking. He may try to sell a 'disinflationary growth' fairy tale via AI investment, but that's total BS.

Worsh wrote an op-ed last fall that was his job interview, saying we can grow out of this in a disinflationary manner like the 1990s. I think he'll try to ride two horses with one ass again, but it's a fairy tale.

How do you see the role of the Fed changing under Worsh and Bessent, especially regarding independence and coordination with Treasury?

Felix

Luke Gromen

Everybody wants an independent Fed, but nobody wants to cut deficits. The debt is too high and there isn't enough balance sheet to finance it without the Fed's help. That's it. The Fed won't be independent; they'll be more married with Treasury. That's inflationary.

Worsh and Bessent criticized the Fed for overstepping on DEI and climate, but if Worsh won't let the Treasury market dysfunction, he won't be that different. The deficit is driven by interest, entitlements, and defense—none of which will be cut. So rates must go up, or the Fed will step in.

The committee is divided. Waller has turned hawkish. How will Worsh convince them to stay flat and not hike?

Felix

Luke Gromen

If the committee resists, Worsh will use the 'no atheists in foxholes' approach: let the market crash, then they'll come around. Near-term, that means pain in all markets—stocks down, bonds down, dollar not up. That's the Fed's worst nightmare.

We saw this with the TARP vote: it failed, the market crashed, then everyone got religion and passed it. If Worsh can't get the committee on board, he'll let the market force them.

The dollar is not rallying despite the energy supply shock. Why is that, and how troubling is it?

Felix

Luke Gromen

Dollar down, bonds down, stocks down is capital flight. Money is leaving the dollar. You can't put oil in your truck with dollars; you need oil. This is a very bad sign. It makes Worsh's job infinitely harder.

We saw this on Liberation Day: capital flight for a week until Trump paused. Now it's happening again. The choice is simple: the dollar or the bond market. They have to sacrifice one.

Which levers will be prioritized now that we have reaccelerating inflation and a strong labor market? The old plan of cutting rates and shrinking the balance sheet seems impossible.

Felix

Luke Gromen

Worsh's plan was to cut the front end, sell the long end, deregulate banks so they buy the treasuries (QE through banks), and then force them to lend to Main Street. But the Iran war has blown that up. You can't start an inflationary war when you've shifted issuance to the front end. It's galactically stupid.

The deregulation allows banks to load up on infinite leverage on treasuries. It's just QE through the banks, like in 2020 when they suspended SLR. But now with the war, the front end is spiking, and the whole plan is dead.

What do you think actually happens from here based on game theory?

Felix

Luke Gromen

I think Hormuz stays closed through fall. Oil will spike, forcing rate hikes. With 122% debt-to-GDP and 6% deficits, that will send the deficit to 8-10%. Foreigners will sell treasuries to buy oil, triggering a debt spiral. The physical world will kick the financial world in the head in 1-2 months.

The Iranians see this clearly. China's oil imports are down 4-5 million barrels a day, but they're not collapsing—they have EVs and stockpiles. They may be happy to let this go on. The F-15 shot down by a Chinese missile shows they're helping Iran. This is a pain contest.

How do you see the China summit and the role of financial warfare, especially regarding Japan?

Felix

Luke Gromen

If any good news came from that summit, Trump would have bragged about it. He didn't. China may be playing a strategic game: leave Hormuz closed, let the US bond market blow up. Japan and Korea are trading like emerging markets, heading toward debt crises. That's not good for anything except gold.

Japan and Korea have been trading like emerging markets since last October. Higher yields are driving weaker currencies—that's a market saying they're close to a debt crisis. The US may have done a deal with them to kill their currencies in exchange for reshoring factories.

What about the UAE leaving OPEC and the swap lines? How does that fit into financial warfare?

Felix

Luke Gromen

The UAE threatened to price oil in yuan if they didn't get swap lines. Bessent promised them, then they left OPEC to ramp up production. Strategically, if oil is priced in gold via yuan, you don't need OPEC—you maximize production to get as much gold as possible. China has swap lines with 185 countries; the US is no longer the only game in town.

China has set up offshore yuan clearing banks at every major gold hub. If you run a surplus in yuan, you can exchange it for gold. That changes the incentive for oil producers: maximize output, buy gold cheap. The UAE now has leverage over the US.

How do you see the short-to-medium term versus the longer-term tailwinds for risk assets?

Felix

Luke Gromen

I'm very cautious near-term. Global bond yields are breaking out again. That's bad for bonds, stocks, gold, and Bitcoin. Gold and Bitcoin are telling us something wicked this way comes for risk assets. Valuations are in la-la land—the adjusted Warren Buffett metric is higher than in 2000 or 2021. Terrible risk-reward.

The adjusted Warren Buffett metric (equity market cap minus federal debt, divided by GDP) is at an all-time high. The only times it was close were 2000 and 2021—both terrible times to own stocks. With yields rising due to a stupid war, I'm happy to sit and be patient.

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