If you’re like me, you’re a little Warsh-ed out by now, which is to say weary of ad nauseam commentary deriding Kevin Warsh following last week’s debacle on the curve and reports that the new Fed chair’s been on the phone with Donald Trump “repeatedly” since taking the reins from Jerome Powell in May.

I’ll reiterate that as tired as you may sometimes get of listening to me editorialize around any given “hot topic,” rest assured I’m at least that fatigued with paraphrasing myself. If I’m harping on something, it’s because whatever that something is happens to be important. And in the macro-market context, nothing’s more important than the future of Fed independence in an era of high inflation.

With that as the setup and in the interest of rounding out Thursday’s coverage with a dash of equities-specific color, it’s worth reminding ourselves that stocks do well when the Fed allows inflation and the economy to run hot, as some worry Warsh will do, notwithstanding his “lady doth protest too much, methinks” assures on price stability.

The figures above were mainstays of any Mike Wilson note ca. 2021, and he re-upped them this week.

Corporates operate in the nominal world, and as long as consumers are willing to foot the bill for higher input costs, inflation can be a revenue boon particularly given that households can’t always discern whether a given price hike is “excessive.”

The year after the pandemic, many companies took advantage of that ambiguity by raising prices above and beyond what was necessary to offset higher costs. In the presence of abundant “stimmy,” consumers didn’t ask too many questions. Margins rose to records and haven’t receded since.

That’s why stocks are an inflation hedge, as it’s why there’s a very tight correlation between corporate revenue growth and producer price growth (as shown in Wilson’s “Exhibit 12”).

“As with most inflationary cycles, the danger for equities typically emerges when the Fed becomes overly restrictive in response to pricing pressures, not when it allows inflation and growth to run hotter for longer,” Wilson said, adding that in his view, the Warsh Fed “will err on the dovish side this year relative to expectations much like [the Powell Fed] did in 2021.”

That’d be good for stocks right up until the inflation situation becomes untenable, at which point one of the quickest ways to bring the situation under control is to engineer a reverse wealth effect.