Wall Street Bets the Fed Is Bluffing in High-Stakes Inflation Game; Elon Musk Cites Twitter Whistleblower in New Letter Seeking to Scrap Deal; Truth Social's Google Play Store holdup; Happy 92nd birthday, Warren Buffett; Are my dad's heart problems related to COVID?; The U.S. Open yesterday

1) Stocks tumbled on Friday after Fed Chair Jerome Powell in a speech that day hinted at continued aggressive interest rate hikes and said "some" economic pain now was preferable to more of it later. Here's the key paragraph:

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

This August 18 Wall Street Journal article captures what's going on: Wall Street Bets the Fed Is Bluffing in High-Stakes Inflation Game. Excerpt:

The Federal Reserve says it is going to keep raising interest rates.

Wall Street thinks it's bluffing.

This could spell trouble for both of them.

Markets pummeled by the Fed's rate increases in the first half of the year are racing upward. The S&P 500 is up 17% from its mid-June low. The yield on the 10-year U.S. Treasury note, which is used to help set rates on debt such as mortgages and student loans, is down more than half a percentage point from its June peak. Even battered cryptocurrencies have jumped.

For many investors, the rebound reflects a belief that inflation has peaked, and expectation that the Fed will shift from raising rates to lowering them sometime next year.

A parade of Fed officials has tried to push back. "There's a disconnect between me and the markets," Minneapolis Fed President Neel Kashkari said last week.

An expectation the Fed will start cutting interest rates in the next six to nine months isn't realistic, Mr. Kashkari said. It is more likely the Fed will "raise rates to some point, and then we will sit there until we get convinced that inflation is well on its way back down to 2%," he said.

If the Fed follows that path, markets are likely to face a painful reckoning – one that could unwind much of the recent rally and extend what has been a tumultuous stretch for investors from retail traders to hedge funds to pension funds.

"We think the market is getting ahead of itself," said Wei Li, global chief investment strategist at BlackRock.

My take: I agree that the market was getting ahead of itself, which is why in my August 17 e-mail I wrote:

• I'm shifting my overall outlook for the market over the rest of this year from "moderately bullish" (as outlined in my August 2 e-mail) to "neutral,"
• I think it's a good time to bank some profits in growth names that have rallied strongly over the past two months.

Since then, through yesterday's close, the S&P 500 is down 6.3% and Cathie Wood's Ark Innovation Fund (ARKK) – a good proxy for growth stocks – is down 17%.

2) Given that Elon Musk is throwing everything against the wall in an attempt to weasel out of the agreement he signed to acquire Twitter (TWTR) for $54.20 per share, this isn't surprising: Elon Musk Cites Twitter Whistleblower in New Letter Seeking to Scrap Deal. Excerpt:

Lawyers for Elon Musk sent a new letter to Twitter again seeking to terminate his $44 billion agreement to buy the social media platform, this time citing recent allegations made by whistleblower Peiter Zatko, Twitter's former chief security officer.

Mr. Musk and his lawyers initially sent a letter to Twitter on July 8 seeking to abandon the deal, though Twitter has since challenged the validity of that notice. Last month, Twitter sued Musk over his attempt to walk away from the deal. A five-day nonjury trial is scheduled to take place in Delaware Chancery Court in October.

In a new letter dated Aug. 29 and made public on Tuesday, Mr. Musk and his lawyers said the allegations in Mr. Zatko's complaint, if true, would demonstrate a breach by Twitter of certain provisions of the merger agreement.

Bloomberg columnist Matt Levine had insightful commentary on this in his column yesterday: Musk Tries a New Way Out of Twitter. Excerpt:

So now Musk's fight with Twitter is a fraud case. I still don't love his chances. Ann Lipton, the expert on this topic, has a good Twitter thread and blog post about the legal analysis here, which I will summarize by saying (1) the bar for proving fraud is pretty high and (2) a court is going to be pretty annoyed by Musk's opportunistic pivot to a totally different legal theory.

My view continues to be that Judge Kathaleen McCormick is going to toss this new claim on the same junk heap as Musk's prior claims and order him to buy Twitter.

3) This is another blow for my No. 1 stock to avoid, Digital World Acquisition (DWAC), which has a deal (that I think the SEC will block) to acquire Truth Social: Scoop: Truth Social's Google Play Store holdup. Excerpt:

Google hasn't yet approved Truth Social's Android app for distribution via its Play Store because of insufficient content moderation, a Google spokesperson tells Axios.

Driving the news: Truth Social CEO Devin Nunes last week claimed the decision about when the app would be available on Android "is up to Google," but Google insists that the ball is in Truth Social's court.

What Nunes is saying: "I don't know what's taking them so long."

What Google is saying: "On Aug. 19, we notified Truth Social of several violations of standard policies in their current app submission and reiterated that having effective systems for moderating user-generated content is a condition of our terms of service for any app to go live on Google Play."

• "Last week Truth Social wrote back acknowledging our feedback and saying that they are working on addressing these issues."

...The bottom line: Because Truth Social isn't available on Android operating systems, around 44% of U.S. smartphone users can't download it.

4) Happy 92nd birthday, Warren Buffett!

While he has slowed down physically in recent years, mentally he seems to be getting better with age, which is truly remarkable!

It's one reason why I continue to call Berkshire Hathaway (BRK-B) "America's No. 1 Retirement Stock"...

But the main reasons are that the company is firing on all cylinders, it has a Fort Knox balance sheet, and the stock is 20% undervalued (see my August 9 e-mail for my calculation of Berkshire's intrinsic value).

5) Thank you to everyone who responded to yesterday's e-mail by sharing their personal experiences, advice, and/or best wishes about my dad's heart procedure on September 16.

To answer the most common questions, there is no way to know whether his atrial fibrillation (A-fib) resulted from the three COVID vaccination shots he received, COVID itself, or neither (i.e., the timing was just coincidental).

I highly doubt it was the vaccines, because he received shots in February, March, and September last year and had no ill effects. (Ditto for the fourth shot in June.) Also, the only heart-related issues associated with the vaccines are associated with young men (see: What to Know About Myocarditis, a Rare COVID-19 Vaccine Side Effect in Young People).

Rather, my dad's weakness and irregular heartbeat, which he had never experienced in his first 80 years, came in the immediate aftermath of having COVID in the last week of December and first week of January.

Could it be coincidence? Absolutely. But I suspect not, as various heart issues are common during and after COVID – just Google "A-fib long COVID."

6) Being the tennis junkie that I am, every year I go to the U.S. Open, which started yesterday.

I especially like the early days because you can see a dozen matches over more than 12 hours (if you're really hardcore – I only lasted nine!), all for a ticket that most days is $80 to $120 on the ticket reseller sites. And that often gets you front-row seats at all but the three main stadiums. Here's a picture of me watching No. 5 seed Casper Ruud:

There were times when he came to my side of the court when I could have reached out and shaken his hand. It's amazing to see the power, speed, and precision of the top players up close...

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.