The red line

Are markets amoral?

Of course. If there’s money to be made, investors will embrace anything. Like corporate earnings. If it’s interesting, but irrelevant, like wars, Oasis or the erosion of democracy, nobody cares. At first.

Look at Bay Street. Up this year so far by over 13%. The gain in twelve months has been an outsized 21%. And yet we went through a bitter election, have a new and untested PM, got slapped with tariffs and annexation talk, are seeing a real estate plop and witnessing a softening economy.

But, yet, Scotia profits have leapt 32% and BeeMo’s by 24%. That’s what matters. Party on.

On Wall Street the S&P has gained about 10% in 2025 and is ahead 15% for the past year. And you know the context. A rogue president, a 19th Century economic policy, the highest tariffs since the Depression (which was caused in part by high tariffs), mass deportations, troops in the streets, assaults on universities, gutting of the federal government, tax cuts for the wealthy and health care cuts for the unrich, rejigging of electoral maps to retain power and in recent days a presidential mugging of the indy agencies churning out job stats and setting interest rates.

But, hey, Q2 corporate earnings are sweet. AI will change the world. Nvidia to the moon.

So Gaza, Putin, Ukraine, Netanyahu, a global trade war, more wealth inequality and democratic institutions don’t matter.

Until they do.

It looks like Trump may be crossing a red line. In recent hours short-term US bond yields fell and long-bond yields rose, steepening the yield curve. The US$ lost value, pushing the loonie higher. Investors are betting the US central bank will lower rates soon and into 2026, then inflation will return bigtime making longer-duration bonds less attractive.

Howcome?

Trump says he is firing Lisa Cook, one of seven governors of the Fed, which sets American interest rates and largely determines credit markets around the world – including ours (the Bank of Canada follows Fed policy 91% of the time). He is doing this, along with relentlessly attacking Fed chair Jerome Powell, because he wants drastically lower interest rates.

Why?

That would paper over the negative impact of tariffs which have increased nine-fold, inflate asset values (like stocks), drop the dollar and help the US in the trade war and make the massive $36 trillion debt (to which he is adding $4 trillion) cheaper to carry. But those crashed rates (Trump wants a 3% cut from the existing 4.25-4.5% range) would bring massive stimulus resulting in inflation without underlying economic growth. A sugar high. Maybe a fentanyl one.

The strategy – since Powell won’t quit before his term is up in May and can’t be fired – is to stack the Fed board with Trump toadies. One is soon to be in place to fill a vacancy. Offing Cook will give another opportunity. And there are already two governors sympathetic to the orange guy. This is how he gets cheaper money.

As for Cook, she will fight. And probably lose. Everybody loses when they face the new strongman. She stands accused (without evidence or being charged) of lying on a mortgage app before she joined the Fed, saying a rental house was actually a PR in order to get a better loan rate. If she did, Cook was in good company since 22,000 others did the same that year.

By the way, Cook is an international economist with a degree from Oxford, a doctorate from the University of California and was a professor of economics and international relations before being asked by Joe Biden to stand for the Fed job as governor – which was approved by Congress. And she’s black. The first one.

As you know, this comes after Trump summarily fired another woman – a career economist who headed the agency that gathers jobs data. When the Bureau of Labour Statistics reported a weakening labour market, the president punted her, saying the data was rigged to hurt him. She had nothing to do with the numbers her agency gathered from the field.

So, is this the line? The red one?

And what about the executive order Trump signed Monday commanding that the military establish special units in all 50 states to deal with civil disobedience? That day he also said he’d send troops into Chicago. Then probably Baltimore, New York and Oakland – on the pretext of rampant crime (homicides in Chicago are down 30%). Is this how martial law starts?

But it was never about crime. The tariffs against Canada were never about drugs or a few migrants crossing the border. The attack on Cook is not about mortgage fraud. It’s just Trump’s way of achieving absolute power and the furtherance of his agenda.

To date, nobody is stopping him. Not Congress. The courts. The supremes, The generals. The bureaucracy. Or the weak, disorganized opposition.

That job will probably be left to Mr. Market. And it will probably come.

About the picture: “As a long-time reader, I am heading your call for more dog pictures,” writes Kenneth. “Attached are two pictures of Charlie, a 4 month old Brittany. You featured his older brother Jasper on May 13, 2024. Feel free to use in an upcoming post. I will do my best to get a picture of Charlie and Jasper together to grace another of your posts. Keep on keeping on.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/08/26/the-red-line/