Key Insights

The Great Transition: From a Deflation Mindset to a Debasement World

"Thematically, our view is that the world is transitioning from what we call a deflationary mindset to a debasement mindset... in that world, you're more or less, you're structurally bullish on equities and bullish on hard assets in general." - Warren Pies

The post-GFC (Global Financial Crisis) era was defined by a "deflationary mindset," where the primary concern for investors was debt deflation and the preservation of principal. Warren Pies argues that the pandemic marked a definitive end to that period, ushering in a "debasement mindset." In this new regime, the central challenge for investors has shifted from protecting principal to maintaining purchasing power in the face of persistently higher asset prices and living costs.

This transition is not a cyclical blip but a secular, multi-year shift driven by a fundamental change in fiscal policy. The behavioral impact is already evident, as Pies notes that retail investors have been trained to "buy the dip," a strategy that proved highly effective during the recent market sell-off. This psychological shift suggests that capital will continue to favor assets that offer a hedge against currency debasement, such as equities, real estate, gold, and Bitcoin. For investors, this means the old playbook of fearing deflation and prioritizing cash-like safety is obsolete; the new imperative is to stay invested in growth and real assets to keep pace.

Fiscal Dominance Has Cast the Die; Fed Rate Cuts are Inconsequential

"If you're really mad at the Fed, you should probably redirect your anger at the fiscal authorities... this 25 basis point cut, it's really going to be inconsequential in the grand scheme of things. And the die has already been cast." - Warren Pies

While markets remain fixated on the Federal Reserve, Pies contends that the Fed's actions are now secondary to the overwhelming force of fiscal policy. The U.S. government is running pro-cyclical deficits of around 7% of GDP at a time of peak economic expansion (unemployment near 4%), a situation without precedent in the post-WWII era. This level of spending injects "high power" money directly into the economy, bypassing the traditional banking and credit channels that monetary policy relies on.

This fiscal firehose is the primary reason the consensus call for a recession in 2022 and 2023 failed to materialize, as it effectively neutralized the impact of the Fed's aggressive 550 basis point hiking cycle. Consequently, a forthcoming 25 basis point rate cut is largely symbolic. The economic paradigm has already been permanently altered by the trillions in fiscal stimulus that have "leveled up" asset prices and the money supply. Investors who continue to over-analyze the Fed while ignoring the structural impact of government spending are missing the single most important driver of the modern economy.

Inflation's Sticky Floor: Why Core CPI Won't Drop Below 3%

"You're not going to get below 3% core CPI. The math just doesn't work. It's just a matter of are you comfortable with looking through tariff inflation and making these policy adjustments? That's what I think the Fed's going to do." - Warren Pies

According to Pies, the pre-pandemic recipe for achieving the Fed's 2% inflation target is broken. That formula relied on a combination of modest services and shelter inflation offset by outright goods deflation. However, the current environment, marked by tariffs and reshoring trends, has flipped goods prices from a deflationary force to an inflationary one. With goods inflation running at 1.5% to 2% or higher, the mathematical path to sub-3% core CPI is virtually impossible unless services or shelter inflation falls to improbably low levels.

This creates a dilemma for the Federal Reserve. Faced with a weakening labor market, the Fed will be forced to cut rates even as core CPI remains stubbornly above 3%. Pies believes the Fed will justify this by choosing to "look through" the tariff-related inflation, treating it as a one-time price shock, much as it did in 2018. This policy choice, while politically contentious, is the most likely path forward. For investors, this signals an era of negative real rates and a policy backdrop that remains highly supportive of risk assets and inflation hedges.

The Labor Market's "Malignant Stasis" Gives the Fed a Green Light to Cut

"The firing rate is now above the hiring rate for the first time this cycle post pandemic... we're calling this current stalling out of the unemployment rate a malignant stasis." - Warren Pies

While headline employment figures have been clouded by immigration-related supply shifts, Pies points to clear underlying signs of deterioration in the labor market. He describes the current situation as a "malignant stasis," where a hiring freeze is taking hold and layoffs are beginning to tick up. Key indicators support this view: the firing rate has surpassed the hiring rate, continuing claims are bleeding higher, and wage growth is at new cycle lows, with the Atlanta Fed Wage Tracker near 4% and private data from Indeed showing just 2.4%.

This pronounced loosening of the labor market provides the Federal Reserve with the justification it needs to begin cutting interest rates, regardless of the sticky inflation picture. Pies argues that the weakness in labor is a more straightforward and pressing concern for policymakers than the nuances of tariff-driven inflation. This dynamic makes a strong case for owning duration, as a weaker-than-expected jobs report could trigger a significant rally in bonds as the market prices in a more aggressive Fed easing cycle.

The Unconventional Bull Case: Why S&P 7,000 is Not Overvalued

"We think that the market can hit 7,000 by 2026 and not be overvalued... If you give us that earnings growth that was baked in and you give us the margin growth... then we think that the S&P 500 will easily hit 7,000 by 2026." - Warren Pies

Challenging the widespread concern over equity valuations, Pies presents a bold, research-backed case for the S&P 500 reaching 7,000 by 2026 without being considered overvalued. This optimistic outlook is not based on simple multiple expansion but on a fundamental belief in a coming productivity boom driven by artificial intelligence and automation. He posits that AI will allow major corporations to significantly expand revenue while holding headcount steady, leading to a dramatic expansion in profit margins.

He cites anecdotal evidence, such as Walmart's rumored plan to add $150 billion in revenue over five years with a flat headcount, as a leading indicator of this powerful trend. In this context, current valuations are not excessive but are beginning to price in a new era of higher, more sustainable corporate profitability. For investors, this means that fearing high P/E ratios is a mistake. The real opportunity lies in identifying the high-quality, large-cap companies that are best positioned to harness AI to drive this next wave of margin-accretive growth.