The Fed Is Irrelevant While CapEx Runs The Economy

The Fed communicates too much; forward guidance and dot plots lock them into bad policy, as seen in 2021 when they continued QE despite high inflation.

Quinn

Tyler

Warsh's testimony was a mixed bag: hawkish on long-end balance sheet reduction, dovish on front-end rates, but it's hard to know what he'll actually do versus what he says to get confirmed.

The market took it as hawkish briefly but recovered within the day.

Tyler

You can't taper a Ponzi; if things blow up, the Fed will expand the balance sheet again regardless of Warsh's ideals.

Global capital flows would repatriate, and you can't reduce the balance sheet without breaking something.

Despite an oil shock, US economic data (retail sales, ADP employment, manufacturing PMIs, M2 money supply) is reaccelerating, suggesting the reacceleration thesis might be back on track.

The energy share of US consumption is much lower than in the 1970s, so the impact on consumers is less severe.

Quinn

Tyler

The AI buildout is a giant capex boom; companies are forced to invest heavily or be left behind, driving a 21st-century industrial revolution.

Tesla expects over $25B in capex this year. AI infrastructure stocks are cheap and keep recovering intraday.

Tyler

Short-term, the market is overextended with massive retail call volume, making it vulnerable to a washout or a gamma squeeze reversal.

17-day rate of change is rich; Avis reversed, Dow transports reversed. A single data point could trigger a fast unwind.

Tyler

Longer term, the AI trend has years to go, but short-term options traders will lose to the math geniuses at Citadel and Jane Street.

You need to go out 2-12 months to have a chance in options; weeklies are gambling.

The economy is fundamentally changing; data center spending is the marginal driver of US growth, and there is a stealth manufacturing boom.

The National Truckload Index is up only, and the bottleneck for AI data centers is finding plumbers, not semiconductors.

Quinn

Tyler

There is a major skills gap; 30 years of teaching liberal arts has left a shortage of engineers, while AI will disrupt 'bullshit jobs' like software developers and financial analysts.

The K-shaped economy is real, and the college bubble taught people 'fake things'.

Tyler

High yield credit spreads are at 317 bps over Treasuries, barely up despite multiple wars, indicating the corporate sector is not overlevered; the government balance sheet is the problem.

The really crappy debt is hidden in private credit, not high yield.

Tyler

Society is moving from capital to labor; the plebs are rising together, which is generally inflationary. States that block data center builds will lose jobs to Texas and Florida.

Community is broken down; people are seeking meaning in religion or socialism, and this generational transfer is playing out in policy.

The current equilibrium is unstable; something needs to break or resolve, whether it's equity indices making the rich richer while inflation stays high, or social unrest over data centers.

This coincides with the climax of the fourth turning.

Quinn

Tyler

Austin's housing supply expansion has lowered home values, which is good for the labor pool and affordability, unlike San Francisco where regulatory gridlock prevents building.

Cities that take the pain now (Austin, Miami) will leapfrog older crown jewel cities like San Francisco.

US dollar usage via SWIFT is surging, counter to the de-dollarization narrative, suggesting dollar dominance is increasing.

There is no alternative; stablecoins might even boost dollar dominance further.

Quinn

Tyler

The US is the world's largest oil and gas producer, strategically dominant in the Western Hemisphere, and has a willingness to use military force, reinforcing dollar dominance.

The dollar is putting in a massive base and will move higher; there's nothing Bessent can do about it.

Tyler

The yen is the key to watch; if it breaks 160, the dollar wrecking ball emerges and causes credit problems. If they keep a lid on it, inflation gets worse.

It's a policy choice: let the dollar rise and tighten liquidity, or suppress it and let inflation run.

The market is over-positioned with massive call volume; if the yen breaks, a global repatriation of capital could trigger a crash as deltas get sold.

These things all come together at the same time.

Quinn

Tyler

ESG was a zero-rate phenomenon that died when inflation returned; now even left-wing people are talking about energy security.

Pension funds that wouldn't meet with oil companies are now flipping their mandates.

SignalTube