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To investors,
The President of the United States stepped up to the podium in the Rose Garden last April and he unleashed chaos in financial markets. His announcement of sweeping tariffs on all US imports sent markets into a free fall, academics began having a panic attack, and the internet exploded with various predictions of the next Great Depression.
Of course, this reaction was a complete waste of everyone’s time. The stock market eventually rallied higher and we got new all-time highs every few days. The “experts” were wrong and investors who ignored the noise did very well.
But there was one part of the mainstream analysis that seemed crazy to me at the time: the “experts” kept promising sky-high inflation from the tariffs. As I tweeted multiple times during April 2025, I felt strongly that deflation was a much bigger risk than inflation at the time.
One tweet on April 10, 2025 read: “All the consensus-seeking finance folks told you that tariffs are inflationary, but I will continue to point out that the much bigger risk is deflation.” I still stand by that statement.
You don’t have to believe me, nor do you have to listen to me say it anymore. Kevin Warsh, the next Federal Reserve Chairman, was on CNBC recently and he explicitly stated his belief that technology was going to bring structural price decline and deflation was a serious risk that the Fed should prepare for.
Take a listen to his comments:
AI is going to make everything cost less. We could be at the front-end of a productivity boom. We are probably in the early stages of a structural decline in prices.
These are sentences being said on national television from the man who will be in charge of the Federal Reserve. If you don’t clearly see that the Fed will continue to cut interest rates in the coming months and years, I am not sure if any piece of information will convince you.
Now some of you will claim that Warsh is merely a Trump puppet who knows he has to cut rates to avoid conflict with the President. Others will claim that short-term price increases in oil, or longer-term price increases in commodities, will lead to higher levels of inflation, which would prevent the Fed from aggressively cutting interest rates.
I have no clue what Warsh’s politics are, nor do I have any idea how he will interact with the President. We will have to wait and see on that critique to see what ends up being true. Regarding higher levels of inflation though, it is fairly obvious to me that deflation remains a much bigger risk than inflation for the US economy.
Are oil and gas prices up? Yes. Are commodity prices up? Yes. But the US economy is much more dependent on technology than it has ever been, which is important because technology has been significantly reducing the price of a plethora of goods and services across the US economy.
That structural decline in prices that Warsh mentioned is widely misunderstood. For example, Jeff Booth has said before that “the natural state of a free market is deflation. Prices fall to their marginal cost of production.” If Jeff is right, which I believe he is, then we should expect prices to continue falling, especially as AI and robotics accelerate.
Intelligent critics of this world view will immediately point out that the US government is printing money, the national debt continues to worsen, and inflation has almost always followed these undisciplined spending habits. I don’t disagree that history shows us inflation would usually occur from the spending.
The difference in this moment is the deflationary forces that are swallowing the US economy. We have tariffs, deportations, AI, and robotics that are working together to bring an incredibly strong force into the economy. As Elon Musk has previously said, the US government won’t be able to print enough money to overcome the deflationary force.
I know that sounds crazy. It feels weird to say. But the more I look at the data, the more I believe this perspective to be true: deflation is the bigger risk than inflation.
One of the first big tests for this thesis was the tariffs last year. The market expected high inflation, but the deflationary forces prevented the high inflation from ever showing up.
The second big test of the thesis will be in the coming 2-3 months. Most investors believe inflation is going to surge higher, including CPI readings above 5% year-over-year, but measurements like Truflation suggest that CPI will remain more subdued. If we don’t see CPI fly higher, then it will be clear to those paying attention that deflationary forces are having an outsized impact on the economy.
Lastly, the third and final test of our thesis is whether we see consumer prices start to fall in a material manner. It is not good enough if consumer prices stop going up. That is nice, but it doesn’t provide the type of deflationary pressure that makes life more affordable. Flat prices only ensure life is not getting MORE unaffordable.
But if prices start to come down for the American consumer, that is when the economy could hit an economic golden age. This would allow for a high growth, low inflation environment. Quite literally, the dream of central bankers around the world.
Every American should be praying for the AI companies to usher in an aggressive deflationary force that improves affordability, while ensuring GDP growth. If we can get that done, every politician, central banker, and regulator will look like a genius.
Who cares which bureaucrat takes credit for the economic win. The American people simply want lower prices, so they can pursue economic prosperity. Let’s hope we get everything we dreamed of.
Have a great day. I will talk to everyone tomorrow.
- Anthony J. Pompliano
Founder & CEO, ProCap Financial (Nasdaq: BRR)
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