The Second Order Derivative

The Fed Task Forces, the resumption of disinflation and a looming tech correction

Note: We’ve made some significant changes to our equity sector and asset allocation models in recent weeks that we expect to make it easier to interpret and will be an important component of many investors investment process. Consequently, with our typical two-day lag (Monday Morning), we are releasing the full note to our introductory (free) subscribers to tempt you to transition to a full subscription.

The second-order derivative is the derivative of the first derivative of a function, describing how the rate of change itself changes.

· Unscripted Family Fights: The Fed’s latest communications showed less internal conflict than expected, with Waller, Williams, and the meeting minutes largely maintaining the reduced-forward-guidance posture. More important was the task-force lineup, particularly Jeremy Stein, William White, and Tom Sargent, which points toward a broader rebalancing of monetary policy through lower rates, fewer reserves, less duration suppression, and regulatory relief.

· Return to Disinflation: The inflation outlook is shifting back toward disinflation as tariff refunds, weak consumer-goods pricing from China, and softer shelter/core-services trends work through the data. A cooler CPI path by the September FOMC meeting may not alone justify rate cuts, but it could give Chair Warsh room to rebalance rate, balance-sheet, and regulatory policy.

· It’s All About the Rate of Change: The section argues that AI-related capex is not necessarily peaking outright, but the rate of growth appears to be stabilizing or decelerating, which is enough to pressure technology and communication-services equities. The author has reduced exposure to those sectors and sees the rate of change in earnings estimates—not monetary policy alone—as the likely catalyst for a correction marked by falling stocks, lower volatility, and rising correlation.