In this issue of Steady Investor, we highlight the three key themes shaping investor decisions currently:
Social Security’s Latest “Deadline” is Serious, But Not as Worrisome as It Seems – The latest Social Security trustees’ report put a familiar issue back in the headlines, which tends to create an annual stir of concern and worry. This year’s report projected that the main retirement trust fund will be depleted in the fourth quarter of 2032, one year earlier than previously expected. If nothing changes, incoming payroll-tax revenue would cover about 78% of scheduled benefits at that point, which is clearly a substantial shortfall. These figures seem quite concerning, but it’s important to think of them in the context of what Social Security is and is not. Importantly, Social Security is not a private pension fund sitting on a pool of market assets that suddenly vanishes on a specific date. It is, and always has been, largely a pay-as-you-go system. Payroll taxes collected today fund benefits paid today, with trust-fund reserves filling the gap when annual revenue falls short.Though the headlines often suggest otherwise, the shortfall is not new. Social Security’s cost has exceeded its non-interest income since 2010, and total cost has exceeded total income since 2021. Last year alone, combined trust-fund reserves fell by $160 billion to $2.56 trillion, even as the program paid $1.60 trillion in benefits to 70 million people.
If Congress were to do absolutely nothing, benefit reductions would eventually be required under current law. But the political odds of lawmakers allowing a blunt, across-the-board cut to current retirees are very low, unless none of those lawmakers want to get re-elected. History suggests some mix of tax increases, eligibility changes, or future benefit-formula adjustments is far more likely.1
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What We Learned from Kevin Warsh’s First Meeting as Fed Chair – Kevin Warsh took the helm as Fed Chairman and oversaw his first FOMC meeting this week. The result was no change to the benchmark fed funds rate, which was broadly expected and not overly newsworthy. May CPI showed inflation running at 4.2% year over year and core inflation at 2.9%, with energy accounting for more than 60% of the monthly increase in consumer prices.Holding rates steady was essentially the only Fed move available. What we did learn from the meeting, however, was how Fed officials were reading the economy and also what kind of chair Warsh may be. Updated projections showed nine Fed officials now see at least one rate hike this year, a sharp shift from earlier expectations.This is key because Warsh entered the job with some expectation that he might tilt more dovish, especially given President Trump’s preference for lower rates. Instead, his first meeting suggested a chair focused on establishing inflation-fighting credibility and signaling independence early.Warsh also signaled to the market that he is poised to have stylistic differences from his predecessors. The Fed’s statement was shorter and more direct, and Warsh introduced several task forces that could reshape how the central bank communicates and operates. For investors, the takeaway is that Warsh’s debut did not hint at a quick pivot to easier policy. If anything, it suggested a more disciplined, institution-minded chair than some may have assumed. Fears of the Fed losing independence appear to have been overblown, as we suspected.3
Oil’s Drop Is Encouraging, but the Supply Picture Still Isn’t Fully Normal – Oil prices fell sharply after the U.S. – Iran Memorandum of Understanding contained language ensuring the reopening of the Strait of Hormuz, easing fears of a prolonged supply shock. As we write, Brent crude dropped to roughly $77.69 a barrel and WTI to $74.90, leaving both benchmarks down more than 13% for the week and back near their lowest levels since the Iran war began.That is clearly encouraging, and gas prices at the pump should follow in time. But the market’s price reaction may be moving faster than the physical oil market itself. The Strait of Hormuz normally carries about one-fifth of global oil shipments, and recent estimates suggest dozens of supertankers carrying roughly 87 million barrels remain stranded inside the Gulf. Even with a deal in place, tankers still need to be repositioned, shipping lanes secured, insurance restored, and damaged infrastructure repaired.In our view, for now this looks more like a release valve than a floodgate, with Gulf exports expected to recover to prewar levels by the end of July, with production normalizing closer to October.We think the worst-case supply shock now looks less likely, which should help relieve inflation pressure. But tighter inventories and a gradual recovery in flows mean energy markets may remain firmer than the headline drop in crude prices alone would suggest.4
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