The Macro Minute: Should the Fed look through the latest inflationary supply shock?

Added: 2026-05-26

[00:00:00]Happy Tuesday out there, team 42. It's your skipper here at Darius D to present our macro minute for Tuesday, May 26, 2026. Hope everyone had an enjoyable Memorial Day holiday with their families. We just want to say we thank all the families of our fallen soldiers out there. We are deeply deeply grateful for your sacrifice and we just want to uplift you uh today with that message.

[00:00:19]So, as always, we'll start with the executive summary from today's leadoff morning note. Uh today's key macro question is, should the Fed look through the latest inflationary supply shock? My answer is no. Inflation will likely remain the market's primary focus this week with Thursday's April PC report serving as a key input for the June 16th to 17th FOMC meeting, which will be the first under Fed Chair Kevin Worsh. In our view, market participants are generally not doing enough work to determine how nominally hot the US economy is, separate and apart from the energy price shot. Because of this lazy broad acceptance of the consensus narrative that inflation would be under control if not for the US Israel Iran conflict, we continue to observe many investors calling for the Fed to look through these price pressures. The risk of the Fed committing a second inflation accident and contributing to a second stock market bubble in a half decade is high amid pervasive group thinking. As always, we'll wrap up with a question from our community here in the 42 macro dashboard. Uh this one's titled vacation season. Not quite a question, but certainly a comment worthy of unpacking.

[00:01:25]It says, "So, is anyone else traveling this weekend? The high gas and airline prices seem not to be affecting people to travel. I traveled on Tuesday last week and both legs of my flight were 100% full. I've been in Celene since Tuesday. My hotel's been sold out.

[00:01:38]People everywhere and young families are here. It was a surprise uh to me. Uh so uh the thing I the reason I wanted to highlight this is because this is exactly what we've been talking about for years in the context of our west village monta effect and all the crayshaped policy dynamics that are contributing to our K-shaped economy.

[00:01:56]What you are witnessing here uh uh talking to the to the member here uh what you're witnessing is a planes full of rich people and hotels full of rich people who have plenty of money whose incomes are being supported by obviously you know a rapidly ascending equity market and and an equity market that has compounded at about plus 20% in each of the past uh three years and it's well on its way to doing that again here in 2026 and so that's those are um contributing factors as well. Don't forget we have a tremendous amount of K-shaped fiscal policy as well. Um when you look at the amount of money that the federal government spends on on means tested programs relative to everything else.

[00:02:33]Everything else being national defense uh net interest on the debt uh and everything else the government spends on. The government spends basically twice as much money on everything else as it does on poor people. And so when you think about the, you know, the multi-million dollar contracts that are coming out from national defense to this company or that company, you think about the trillion plus dollars of net interest that the government spends uh on on on, you know, supporting the uh US uh sovereign debt market, you know, that money winds up in the hands of rich people. It doesn't wind up in the hands of poor people. Again, only about $1.3 trillion of our annualized outlays here in 2026 wind up in the hands of poor people, whereas about $2.6 extra trillion dollars winds up in the hands of rich people, folks like Elon Musk, Alex Karp and all the folks that work at companies uh like that that sell services uh to the government. So that's another dynamic. And then the final dynamic I highlight is the the West Village Monttok effect uh itself. recall that the West Village Monttok effect is an effect that is an economic dynamic that we authored uh a few years ago uh in the context of our resilient US economy theme that essentially says because we have such a high stock of savings on household sector balance sheets the flow of savings can actually decline and has been structurally cyclically and structurally depressed uh for years now in a way that has been supportive of aggregate consumption. Uh so for example, we have about roughly 11.5 trillion dollars of checkable deposits and money market fund exposure on the household sector balance sheet up from about $3.5 trillion prior to the pandemic. So we've had explosive growth in the amount of liquidity on household sector balance sheets is about 5% of total household assets which is you know by far the highest ratio we've seen in terms of cash relative to total household assets. And so households, you know, particularly the households that are exposed to all that uh uh uh extra wealth are are very, you know, filling flush, you know, with cash and income support from the federal government uh in a way uh that is ultimately allowing them to power through, you know, high gas prices, power through uh rising food prices, power through uh the deepening of the nationwide affordability crisis that only really truly impacts, you know, the households on the bottom of our increasingly K-shaped uh US economy.

[00:04:39]So uh don't get you know the consumer confidence statistics are what they are and they are what they are for a reason.

[00:04:44]Consumer confidence statistics are terrible because every vote is counts as one vote in a you know metric like that.

[00:04:50]Whereas the aggregate economic statistics continue to be great because there's an outsized increasingly outsized share of consumption and investment from uh the rich households and the rich families as oo and and as well as the largest uh businesses uh in the economy as well. So it's, you know, the GDP and all those types of statistics are weighted relative to the activity of folks at the top of the K and and and statistics like um consumer confidence are unweed in a way that kind of exposes the true underlying malaise uh that we continue to observe uh in the economy. So we'll wrap it up there.

[00:05:22]Darius Dale here presenting our macro minute for Tuesday, May 26, 2026. Best of luck out there today. We'll catch you back here tomorrow. Cheers.