POW! POW!
12/11/25 Prospero.ai Investing - 275th Edition (Midweek)
As we do sometimes in the midweek letter we start with a GIF. Powell like the rest of the market seems torn between the downside and the upside.
Yesterday’s Fed meeting was a masterclass in cognitive dissonance. On one hand, Powell cut rates for the third time this year. On the other, he spent the entire press conference telling you not to get too excited. The headline move was a 25 bps cut, but the bigger reveal was his admission that the labor market story you’ve been sold is probably wrong. Fed staff now believe the payroll data have been overstating job growth by roughly 60,000 jobs per month, which implies actual job creation may already be negative. That’s not a soft landing; that’s the early innings of a jobs recession hiding in plain sight.
At the same time, Powell all but pinned the inflation overshoot on Trump’s tariffs, calling them the main driver of elevated prices and essentially framing the current flare-up as a “one-time” level shift in goods prices rather than a new inflation regime. Strip out tariffs, and core inflation looks a lot closer to target. That’s the intellectual justification for yesterday’s cut: inflation is structurally under control, but the labor market is slipping under the surface. The problem is the Fed is trying to ride two horses at once — acknowledging downside risk to employment while insisting there’s “no risk-free path” and signaling only one more cut in 2026. Markets heard the words “cut” and “data are weaker than they look” and cheered; the dot plot and language around being “within range of neutral” quietly told you the easing cycle is already on probation.
The internal split at the Fed makes this even more unstable. Three dissents – some wanting no cut, one wanting a bigger cut – is not a detail, it’s a regime-change tell. It confirms what the curve has been whispering for months: the Fed is no longer operating from a shared framework. That’s why you’re seeing this weird mix of equity relief rallies, choppy rates, and a grinding bid for quality. The right takeaway isn’t “risk on because Powell cut.” It’s that the Fed just acknowledged the labor market is weaker, inflation is largely tariff-driven, and yet it’s already talking about pausing.
As our CEO said in this article leading up to this event, that is a recipe for mor volatility.
As well as gradual rotation toward defensives and quality balance sheets, and a premium on owning assets that don’t require a perfectly executed soft landing to work.
Prominent economist Mohamed El-Erian has been vocal about the need for sweeping reforms at the Federal Reserve, arguing that the wild swings in market expectations for rate cuts—from 90% probability to 30% and back to 87%—demonstrate the central bank has lost credibility.
“This Fed went to sleep,” El-Erian stated on CNBC, calling for the institution to move away from reactive, meeting-by-meeting policymaking toward a more strategic, visionary approach. He endorsed Treasury Secretary Scott Bessent’s critique that “we don’t need a play-by-play Fed, we need the Fed to cool it”
Can we snap out of this volatility until there is more predictable Fed? We will assume a continuation until this question is answered.
A WORD FROM OUR CEO
We have been dragged a bit this weeks by names like UAMY but we think some of these are at the bottom and we are holding for the upside. Our paper trading portfolio is 19% above the market on an annualized basis, with a 58% win rate against SPY benchmarks.
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