I assign 15/60/25 probabilities to three Fed scenarios right now. Normally I think of the risks as 5/90/5. Here's what's making the tails wider and how I'm positioned for each.

I worry a lot. Too much probably. Whenever I think of Buffett saying an investor needs a world-class temperament over a world-class intellect, I even worry about that.

For years I didn't worry much because I was in index funds. But the inelastic market hypothesis and Liberation Day tariffs pushed me back to Graham, and now I have a portfolio of individual picks with macro worries layered on top of company-specific worries.

My macro framework mostly comes from Scott Sumner. Here's why I trust him specifically:

2008: He correctly saw that paying interest on reserves while not lowering rates fast enough was a massive tightening when everyone else was watching the headline rate. He was right and almost nobody else was.

Obama years: While prognosticators called for hyperinflation from QE, he correctly called continued stagnation and low rates. Right again.

Post-COVID: While everyone said rising rates meant tight policy, he kept asking where the actual tightening was showing up in NGDP. Right again.

When I run that framework against the current environment I get three scenarios:

Scenario 1 (15%): Warsh fights commodity inflation while NGDP collapses. There's $1.4T in margin debt, $220B in leveraged ETFs, and the inelastic market hypothesis inflating the top market caps. If that leverage unwinds at the same time Warsh is tightening to fight oil prices, the financial plumbing breaks. Lower rates and lower inflation at the cost of a financial crisis. The danger is nobody identifies the Fed as the culprit in real time, just like 2008.

Scenario 2 (60%): There's a lot of ruin in a nation. The AI trade corrects without systemic crisis. Value rotates up. Index funds lose a little. My beaten-down SaaS, healthcare, and insurance positions quietly rerate. This is what rotation days look like, and they're becoming more frequent.

Scenario 3 (25%): Warsh does Trump's bidding the way Arthur Burns did Nixon's. Inflation stays above target and the Fed chases it with ever-increasing rates without catching it. Government spending keeps running while the adults have left the room. Historically that combination produces inflation not deflation.

The normal distribution for these three scenarios is 5/90/5. I'm putting it at 15/60/25 right now because of the Iran War, Warsh's apparent skepticism of expectation management, the Trump administration's unpredictability, and the genuine absence of any coherent alternative fiscal framework from either party.

What I do with this: when monetary policy seems to be tracking 4-5% NGDP growth, I stay in value stocks. When the tails widen, I add to short-term treasuries. I'm at 20% USFR right now. Monday July 27th was a perfect rotation day, up 2% while QQQ was down 1%, and I took a small amount off the table and added to USFR.

Full piece: [https://cavemanscreener.substack.com/p/different-shocks-different-strategies](https://cavemanscreener.substack.com/p/different-shocks-different-strategies)