Shifting Ground

The next possible Fed chair wants financial 'regime change'... What that could look like... It's not all fun and games... The market remains unfazed... A look at housing trends... Our No. 1 recommendation for the rest of 2025...

A call for 'regime change'...

We've written lately to expect a "coming power shift" at the top of the Federal Reserve. President Donald Trump has relentlessly criticized Fed Chair Jerome Powell and is counting the months until his term as the central bank leader ends next May, or until he lowers interest rates.

Today, one of the handful of leading candidates to replace Powell – former Fed Governor Kevin Warsh – went on television to get his stance on the situation out (and perhaps make a plea to Trump for his candidacy).

Warsh used similar terms to our "power shift" wording to describe what could be coming, but he made it starker. "Regime change," he called it, during a long interview on CNBC this morning...

Their hesitancy to cut rates, I think, is actually... quite a mark against them. The specter of the miss they made on inflation [during the pandemic with the "transitory" inflation idea], it has stuck with them. So one of the reasons why the president, I think, is right to be pushing the Fed publicly, is we need regime change in the conduct of policy.

What that would entail other than lower interest rates remains to be seen, but Warsh has a few ideas... And while this might sound like far-off speculation, he very well could be the next Fed chair, so I (Corey McLaughlin) think it's worth a brief discussion today...

What it could look like...

Other parts of Warsh's comments today indicate he may want to clean house at the Fed – not just replace Powell, but also the other dozen or so members of the central bank's policy-making committee. And he has ideas on making even bigger changes than that...

We need a new Treasury/Fed accord, like we did in 1951 after another period where we built up our nation's debt and we were stuck with a central bank that was working at cross purposes with the Treasury. That's the state of things now.

In other words, Warsh wants to change the idea of the Fed's "independence" from the White House. He wants the Treasury (meaning the president) to have an explicit alliance with the central bank.

On the other hand – despite Trump's focus on rate cuts – Warsh isn't a total "dove" on Fed policy (meaning someone who favors lower interest rates and other looser monetary policies).

Practically, Warsh said he sees that Wall Street financial conditions are "hot" right now, using the recent run of IPOs and tight credit spreads as indicators. But the real economy is struggling, he said.

We're "near a housing recession," Warsh said, and "small businesses – they're having a hard time getting credit."

Warsh said in his view that the first step to "begin reform at the Fed" is to lower rates. He is certainly a "low-interest person" that Trump is looking for.

But he also says the central bank needs to keep shrinking its balance sheet – which has ballooned from less than $1 trillion since the great financial crisis to a peak near $9 trillion in 2022 and is still around $6.7 trillion...

[We need to] take a little of this looseness out of the financial markets by getting the Fed out of the fiscal business, out of the political business, shrink that, and then redeploy some of that liquidity to people that need it most in the real economy. I think the Fed has the balance wrong. A rate cut is the beginning of the process to get the balance right...

Now, on the one hand, he is suggesting a cozier formal relationship between the White House/Treasury and the Fed. Yet on the other, he says the Fed should get out of the "political business." That doesn't square.

In any case, this is where the "regime change" could really shake things up...

If we have a new accord, then the... Fed chair and the Treasury secretary can describe to markets plainly and with deliberation, "This is our objective for the size of the Fed's balance sheet."

That strategy – depending on what the details of a "new accord" and the scope of these plans would be – could upset markets, which might not be on a lot of people's radars right now given the headline idea of lower interest rates coming eventually.

But we'll cross that bridge when we get there.

There's still a lot of time for all this to play out, but be prepared for change at the Fed.

Along the way, a surprise in this story – like Trump trying to fire Powell, as was floated recently – could lead to some market volatility. Overall, though, don't be caught off guard by this coming "power shift" or "regime change."

By knowing the Fed will do Trump's bidding on rate cuts by next year, you can prepare your portfolio for a lower-rate environment – which typically means higher performance from riskier assets. But you may also want to get ready for tightening financial conditions in other ways – by redeploying at least some part of the Fed's balance sheet, as Warsh put it – which could offset the lower-rate juice.

We'll keep our ears open for more details and share the investments that could protect and grow your wealth as the story develops.

Meanwhile, today, Mr. Market was again unfazed...

The benchmark S&P 500 Index and tech-heavy Nasdaq Composite Index made new highs, the CBOE Volatility Index ("VIX") was below 17, and longer-term bond yields were little changed.

As Ten Stock Trader editor Greg Diamond wrote to his subscribers earlier today, using a chart of the U.S. benchmark for stocks since March...

Stocks recovered from earlier weakness yesterday, and this recovery has continued this morning.

Let's take a look at the S&P 500 Index...

Within the black dashed lines you can see that the S&P 500 has gone mostly sideways since the first week of July.

For those familiar with Greg's brand of technical analysis, he says this type of sideways price action has the characteristics of a small fourth leg of an Elliott Wave, which could be a bullish indicator for the next month or so...

So the key is how this will play out into early next week and (more importantly) into the first two weeks of August.

We could continue to see this sideways price action over the next few days before another breakout starts next week.

Or, alternatively, we could get some kind of drop next week before the rally (although, drops have been very shallow lately).

The S&P 500 finished about 0.5% higher today, on the heels of a handful of earnings reports that beat Wall Street expectations – notably United Airlines (UAL) and PepsiCo (PEP). Plus, June's retail sales report showed U.S. consumer spending rising by more than expected (0.6% for the month).

Ten Stock Trader subscribers and Stansberry Alliance members, of course, can find all of Greg's research and trade recommendations here. And if you're interested in learning more about his strategy and getting access, visit TenStockTrader.com.

A look at housing...

We wrote above that Warsh, the possible next Fed head, mentioned that the U.S. is "near" a housing recession. Home prices have been heading slightly lower in some parts of the U.S., even as available inventory has risen.

Real estate is local, and some parts of the country remain steady. But in general, the residential market is softening more than anything.

The latest monthly survey from the National Association of Home Builders released today showed that homebuilders are cutting prices at the highest rate in three years. Nearly 40% of builders said they cut prices this month.

Meanwhile, the average 30-year fixed mortgage rate is just under 7%, making homebuying nominally costlier than it has been in much of the past 20 years.

As a result, the association predicts that builders will start fewer new single-family homes this year. Builder sentiment is weakest in the South and West and strongest in the Northeast.

But it's not all gloomy...

As our colleague Brett Eversole wrote in his latest look at "Market Extremes" in True Wealth Systems, published yesterday for his paid subscribers, "housing activity" actually just hit a two-year high. Brett wrote...

Most folks just aren't willing to take on a higher monthly payment today. No one's buying or selling a home unless they absolutely have to. And this freeze has lasted for several years.

Things are finally changing, though. We can see it through data from the Mortgage Bankers Association ("MBA")...

This industry group collects data related to housing activity. One of its tools is the U.S. MBA Purchase Index.

The Purchase Index tracks the total number of new mortgage applications each week. This is where we saw a painful slowdown in recent years. But in a surprising twist, this index hit a two-year high this month. Take a look...

Mortgage applications have crashed in recent years. The Purchase Index dropped by roughly 60% from its early 2021 high to its 2023 low. But as you can see, loan applications have increased in recent months.

Now, this is all relative. While mortgage application activity has edged up slightly, it's still picking up from a multiyear "freeze." Brett says the market still has a "long way to go before it can get back to normal," but this is good news for investors.

As Brett concluded, should the Fed end up lowering interest rates, it could set off a "new surge" in housing activity. That would mean plenty of runway ahead for the residential real estate market to loosen up.

A solution for any 'season'...

We covered a variety of ground today... from the future of the Fed... to the current trend for U.S. stocks... and the housing market, so let us close with this: a portfolio solution for whatever comes next. We mean it. Anything.

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In today's mailbag, more thoughts on tariffs... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"[In 2024, there were] $3.36 trillion of imports into the U.S. and $2.06 trillion of exports from the U.S., which resulted in a trade imbalance of $1.3 trillion for the U.S. I think I'm beginning to better understand Trump's overall objective for the tariffs. He wants to reduce the trade imbalance so more money stays in the U.S. instead of going to the rest of the world. Unfortunately, the tariffs will be difficult for U.S. small businesses but large U.S. companies will prosper if they continue to export the same amount of goods." – Subscriber Norman B.

Corey McLaughlin comment: Yes, this has been about the trade imbalance. If you recall, the Liberation Day "reciprocal" tariff percentages weren't a tit-for-tat response to tariff rates that other countries might have on our imports. They were a measure of trade imbalances (of goods only, and not services).

As we wrote on April 3...

Here's the deal, which we and other people figured out and the White House confirmed after Trump's press conference yesterday...

The percentages are not "reciprocal" on rates currently charged on U.S.-made products. The percentages are instead tied directly to nominal trade deficits with other countries. These are two different things, and that's telling about Trump's intentions.

So, for example, the U.S. had a $17.9 billion trade deficit with Indonesia last year, and it exported $28 billion to us. So $17.9 divided by $28 is 64%.

Then the White House decided to "discount" that by dividing the percentage in half, which comes to the original "reciprocal" tariff rate of 32% Trump proposed for Indonesian imports. (The White House used the same formula to come up with rates for other countries down to a 10% minimum import tax.)

Let's say the goal of the White House would be to apply this math to trade deficits with the entire world. In that case, the U.S. would charge the rest of the world about a 20% tariff, or roughly half of 39% ($1.3 trillion trade deficit divided by $3.36 trillion of imports) based on 2024 numbers.

As of last check, and counting the latest announced 30% tariff threats on the European Union and Mexico, the effective new tariff rate on imports to U.S. is right about there... at 20.6%.

So, thus far, the Liberation Day numbers that shocked the market are actually on track to be in place, barring trade agreements made by August 1. It would be the highest effective rate since 1910.

All the best,

Corey McLaughlin with Nick Koziol
Baltimore, Maryland
July 17, 2025