In Donna Tartt's The Secret History, the narrator compares the childhood experience of discovering that his father was "not only deluded and ignorant, but incompetent in every way" to "walking into the cockpit of an airplane and finding the pilot and co-pilot passed out drunk in their seats."
Investors got a taste of that horror on Wednesday, when Federal Reserve Chairman Kevin Warsh explained his decision to keep rates steady with a series of contradictory, confounding, and supremely confident answers to reporters' questions.
Warsh kicked things off by saying, "For some households, businesses, and market professionals, five years of high inflation have left a mistaken impression...that the Fed's implicit inflation target was somehow above 2%," but in fact, "there's only a target, and it's 2%."
So inflation is above 3% because American households believe the Fed isn't deeply committed to its 2% target? That strikes us as dubious; as Fed governor Christopher Waller said earlier this month, "Sternly staring at inflation until it melts before our withering gaze" will not get the job done.
Bloomberg's Michael McKee put the point to Warsh in the post-decision press conference, saying that while the chairman promises to bring down inflation, "all you've talked about today is talking about it." Warsh parried the unusually harsh question with consultant-speak about the Fed being "in the performance business" but "not having a magic wand."
Despite the great value he puts on his own words, Warsh refuses to give guidance about future Fed actions, explaining that this is so he can hear the "direct and unfiltered" perspective of the markets. So what is the market telling him? Earlier this month, he said a decline in bond yields was good because it showed investors knew the Fed had inflation under control, but on Wednesday, he said that recent increases in bond yields were good because it meant the Fed didn't have to raise rates. Direct and unfiltered.
Stocks initially rose on the news that the Fed was holding rather than hiking rates, but as the press conference wore on, things came unglued. The S&P 500 slumped 1.7% in the final hour of the trading day. Bank of America economist Aditya Bhave explains that traders were so "confused" by the presser that they lost faith in Warsh's Fed. "Market moves post meeting were consistent with a central bank inflation credibility shock."
Warsh wasn't the only leader with a credibility problem. U.S. policy toward Iran seems to alternate between kumbaya and yippee-ki-yay on a daily basis, and NBC News reported this week that President Donald Trump's top military advisors can't agree on what to do from here. According to an unnamed Trump ally, "There was not a real strategy for how long or what they should do to get to the endpoint." The potential for a prolonged conflict sent oil prices up 23% in July.
Meta Platforms CEO Mark Zuckerberg might also have credibility issues. Unlike its Magnificent Seven peers, the company reported disappointing earnings and upped its 2026 capital expenditures forecast range to $130 billion-$145 billion, while remaining mum on 2027 capex (though, on the back of the report, Goldman Sachs boosted its estimate for the company's 2027-28 spending by 14%).
When asked on the earnings call whether the rise of new, cheaper artificial-intelligence models makes it unnecessary for Meta to spend these princely sums to build its own, Zuckerberg reminded investors of his technological genius: "When we got started...I wrote a lot of the systems code. A lot of the reason why Facebook worked was because it just worked, right? Like, it literally worked."
Zuckerberg might have wanted investors to trust his not-so-secret history, but they confidence is hard to come by. Not only were Meta shares in the hurt locker even ahead of Meta's 9% post-earnings drop, but credit-default-swap spreads on the company's bonds are significantly widening out, which indicates traders see greater risk in its debt. And as perceived credit risk grows, it becomes even more expensive to borrow.
Speaking of wunderkinds, this week's look into the cockpit of the hedge fund industry has also been discouraging. Situational Awareness, a hedge fund led by 24-year-old former OpenAI researcher Leopold Aschenbrenner, grew as big as $45 billion in July thanks to winning bets (long AI, short software) and big capital raises. Then the trades moved against him, his leveraged positions were sold off, and now Citadel is stepping in to buy the fund's stock portfolio, according to multiple reports. Will this resolution remove a short-term headwind for Situational Awareness holdings like SK Hynix? Perhaps. But it also makes one wonder how much of the powerful rally in AI-associated shares has been driven by inexperienced and overleveraged true believers.
Despite all the incompetence at the top -- and the daily volatility -- the markets have barely budged this week. It certainly helped that Amazon.com and Microsoft actually seemed to convince markets that their AI spending was producing profits. In fact, earnings have been strong across the board; according to FactSet, S&P 500 companies are set to report a record net profit margin of 15.7% for the second quarter.
So the airplane is still aloft -- but the nervousness is palpable. Unless firmer hands take the yoke of the plane, don't be surprised if investors reach for their parachutes.
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