Current Situation. Status: Unclear. Mood: Complicated
INTERNAL MEMO — EYES ONLY
From: The Building. To: Everyone Who Survived the Week.
Filed: February 18, 2026
RE: Current Situation. Status: Unclear. Mood: Complicated.
Please be advised that the Federal Reserve has released its January FOMC minutes, and no, they don't tell you anything you didn't already know. The committee remains "attentive to risks on both sides of its dual mandate." Rates stay at 3.5%–3.75%. The door to March cuts is open approximately two inches. The Fed would like you to know that it is watching. Always watching. Thank you for your patience.
In related news, we regret to inform you that the next chair of this institution — the one being groomed to steer $23 trillion worth of financial gravity — is a man who resigned from his last Fed job in 2011 because he didn't like quantitative easing. Kevin Warsh, hawk-in-waiting, is now reportedly close to confirmation, pending a Senate process that the DOJ building renovation scandal may or may not complicate. Markets received this news with "relative composure," which is analyst-speak for nobody wants to be the first one to panic publicly.
His last formal act of Fed dissent was opposing QE2. QE2. We are now seven rounds of emergency interventions past that. The man walked out of a room because they were buying too many bonds, and we are about to hand him the keys.
Again: thank you for your patience.
RE: The Great Rotation. Status: Very Real. Duration: Unknown.
This week the Russell 2000 posted its 12th consecutive day of outperforming the S&P 500. Twelfth. The last time small caps held that kind of streak against large caps was June 2008. Make of that what you will. We are certainly not going to tell you what to make of that.
The January CPI print — 2.5% annualized, against a 2.7% consensus — was the trigger. Markets had been bracing for tariff-driven stickiness. Instead, they got data soft enough to reprice the March cut probability from 40% to above 75% in a single morning. The IWM jumped 3.2%. Biotech stirred. Regional banks crawled out of the shadows. The valuation gap between the Russell (roughly 16x forward earnings) and the S&P (25x) finally started closing its mouth.
The Magnificent Seven have not been magnificent in 2026. Apple: down 8% YTD. Meta: down 8%. Microsoft: down 6%. These are not rounding errors. These are companies with a combined market cap larger than the GDP of Japan, and they have collectively spent the first seven weeks of the year going sideways or south while companies making industrial fasteners and regional dental chains hit new highs.
The rotation is real. Whether it has legs past the next inflation print is a different question, and it is a question that nobody in this building is currently authorized to answer.
RE: The Central Bank Succession Question. Status: Unresolved. Tension: Elevated.
There is a version of the Warsh nomination that is reassuring. He's institutionally credentialed, broadly respected, not a political creature by nature. His crisis-response work during 2008-2009 was serious. The initial dollar and rate market reaction — calm — suggests sophisticated money is choosing to read him charitably.
There is also a version where a Fed chair who publicly opposed balance sheet expansion takes office into an environment where the balance sheet question will resurface the moment growth slows. Where "hawkish credentials" meets a White House that has made no secret of preferring cheap money. Where that collision, in the middle of a fragile soft landing, at 3.5%–3.75% with inflation not yet dead and tariffs at an average effective rate four times what they were two years ago, creates the kind of institutional confusion that bond markets punish for years.
The 10-year at 4.03% is telling you, politely, that the bond market has not decided which version it believes in yet.
Powell's term ends in May. He has not announced whether he'll remain as a Governor through 2028. Until he does, there will be a low-grade hum of Fed governance uncertainty underneath everything else. Markets hate hums. They can live with loud crashes — those they can price. Hums are harder.
RE: Tariffs. Status: Escalating. Absurdity Level: Consistent.
For the record, as of this memo, NATO members face escalating import tariffs starting at 10% and rising to 25% in June — unless they agree to purchase Greenland. France faces 200% tariffs on wine and champagne because its president expressed unwillingness to join something called the "Board of Peace." The UK has been labeled "problematic" over the Chagos Islands situation.
The average effective U.S. tariff rate sits near 18%, up from roughly 3% in 2024. The Fair Trade Act has made this permanent executive authority, codified into law. The One Big Beautiful Bill Act offers domestic manufacturers tax relief to soften the blow. The net effect is a tax on American consumers and a subsidy for American producers, administered through an apparatus of presidential decree, and the market's verdict is to buy IWM and sell XLK.
Which, honestly, tracks.
The small-cap bet is fundamentally a domestic revenue bet. If you make money within U.S. borders, you are insulated from currency volatility, supply chain chaos, and retaliatory tariffs. If you are a multinational with factories in seven countries and a logistics network spanning four continents, you are currently updating your scenario planning from "theoretical" to "operational."
The Bank of America GDP forecast of 2.8% for 2026 looks ambitious in that light. Not impossible. But ambitious.
RE: Bitcoin. Status: Weak. Narrative: Adrift.
BTC had slumped from above $83,000 to as low as $74,570 heading into this week, its lowest level since April and roughly 41% below the October record of $126,000. That record, for context, was set in a world where the macro mood was looser, the dollar was softer, and there was no Kevin Warsh confirmation hearing on the horizon.
Crypto in 2026 is caught between two stories. The "digital gold" story says BTC rallies when rates fall, dollar weakens, real yields compress. The CPI print should have been bullish. It wasn't. The "risk-on" story says BTC rallies when the Russell rallies and mood is expansive. The Russell IS rallying. BTC isn't following.
What that means is either that the correlation has broken — genuinely, structurally — or that the next leg requires something more decisive than a single CPI beat. June. If Warsh is seated and comes in dovish on the opening act, and if the spring data continues to cooperate, and if gold stabilizes after the unwind of the crowded position that cratered it from $5,550 to $4,423 in a matter of days, then the conditions reset. Until then, BTC drifts.
The gold crash, incidentally, was not a fundamental story. Analysts across the board called it a position unwind, crowded longs getting squeezed, not a signal about inflation or macro. Gold is still up roughly 8% year-to-date even after the collapse. Silver up 13%. The panic was manufactured by leverage, not by reality. These things happen. File it under "asset classes behaving badly in public" and move on.
RE: Palo Alto Networks Earnings. Status: Tonight. Stakes: Elevated.
PANW reports after close. The cybersecurity sector has been using AI as a product story for two years; Palo Alto was early and loud about platformization. Tonight's call will be the next data point on whether that strategy is converting into durable revenue, or whether the AI narrative is wearing thin in the same way it's wearing thin across XLK broadly.
Fortinet (FTNT) and CrowdStrike (CRWD) are watching. So are the analysts who need to decide whether cybersecurity deserves a premium multiple in a world where AI is simultaneously the threat and the product.
We will have more to say about this when the numbers exist.
RE: Homebuilders. Status: Deteriorating. Irony Level: High.
Homebuilder sentiment: 36 in February, down and falling. The sector that was supposed to benefit from rate cuts has instead discovered that rate cuts are priced in but affordability isn't fixed by expectations, only by execution. Until the 30-year mortgage rate actually moves materially, builder confidence will stay in the basement of the house nobody can afford to buy.
There is a version of 2026 where the rotation, the rate cuts, the OBBBA stimulus, and the domestic reinvestment narrative all combine into something that looks like an actual, durable, broad-based recovery. Not just in markets. In the economy that most people actually live in.
That version requires a Fed transition that doesn't spook the bond market, tariffs that don't structurally raise input costs faster than the tax cuts reduce them, and small-cap earnings that actually deliver on the 18-22% growth projections rather than simply repricing on hope.
It is not impossible.
It has also not happened yet.
This memo does not constitute financial advice. The Building assumes no liability for decisions made on the basis of information contained herein. Management is watching the March FOMC date very carefully. So should you.