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AI capex drains Fed's power

Sunday, April 26, 2026 · from 2 podcasts, 3 episodes
Forward GuidanceBreaking Points
  • AI data center spending is siphoning capital from markets, weakening the Fed’s control over liquidity.
  • Rural resistance in Ohio and Virginia reveals the political cost of Big Tech’s energy grab.
  • Treasury now manages bond volatility, not the Fed - a silent shift in monetary power.

The Federal Reserve is losing its grip - not because of policy failure, but because the economy is pulling money out of financial markets and into physical infrastructure. Michael Howell on Forward Guidance calls it the Speculation phase: real economic activity, driven by AI capex, is absorbing the cash that once inflated asset prices. Money can’t be in two places at once. When Tesla allocates $25 billion to factories and Google builds 800-acre data centers, capital leaves Wall Street for Ohio backyards.

The shift is structural. Nvidia’s Jensen Huang doesn’t need more coders - he needs plumbers. Data centers require cooling systems, power grids, and water rights that rural communities are now refusing to grant. In Franklin Furnace, Ohio, residents are fighting Google over a high-pitched mechanical whine that makes homes unlivable. Voters in Wisconsin and Virginia have blocked similar projects. The blue-collar boom is real, but so is the backlash.

"Money cannot be in two places at once. If cash is funding a factory's working capital, it isn't buying call options."

- Michael Howell, Forward Guidance

The Treasury, not the Fed, is now managing liquidity. By swapping long-dated debt for short-term bills, it’s shortening duration and suppressing bond volatility. When the Move index spikes, the Treasury buys back older bonds. This backdoor stimulus masks a deeper truth: the private sector can no longer absorb the debt load. The interbank market has vanished. The state fills the void.

Kevin Warsh’s Senate hearing confirmed the Fed’s irrelevance. He called for abolishing forward guidance, arguing it traps policy in outdated narratives. Yet Trump wants a loyalist to cut rates - even as oil hits $300 and inflation reignites. Warsh dodged questions about Trump’s 2020 claims, fueling fears of political capture.

"The narrative of de-dollarization is colliding with data. Swift transaction numbers show US dollar usage is surging."

- Tyler Neville, Forward Guidance

The real economy has momentum. But that momentum destroys liquidity. Howell warns the gold-to-oil ratio is breaking. When commodities spike, wealth transfers from consumers to producers - draining the very cash pool that fuels speculation. The winter bottom? Likely 2027. Until then, the Fed watches.

#Macro#Regulation#AI Infrastructure
TeslaFederal ReserveGoogle

Source Intelligence

- Deep dive into what was said in the episodes

Forward Guidance
Forward Guidance

The Fed Is Irrelevant While CapEx Runs The Economy | Weekly Roundup • Apr 24

  • Kevin Warsh advocates for significant reforms at the Fed, proposing to eliminate forward guidance and dot plots, and to enhance economic analysis for more accurate inflation measures.
  • Quinn argues excessive Fed communication creates policy lock-ins, citing 2021 QE continuation despite high inflation. Tyler believes balance sheet reduction is idealistic and will likely revert to expansion during systemic shocks.
  • The economy is undergoing a fundamental shift, with AI driving a massive capital expenditure boom. This is evidenced by surging M2 money supply, bank lending at levels unseen since 2008, and data center spending surpassing general office spending.
  • ADP data shows labor reacceleration, but a significant skills gap exists where liberal arts graduates struggle while engineers in AI-related supply chains thrive. AI is expected to displace "email sending jobs" like financial analysts and accountants.
  • High yield spreads are near historical lows at 317 basis points over Treasuries, suggesting corporate financial health. However, Tyler posits that much of the riskier debt may now reside hidden within private credit markets.
  • Tyler highlights how Austin's expansion of housing supply has lowered home values, boosting affordability and attracting workers. This contrasts with San Francisco's restrictive policies, which perpetuate unaffordability and hinder growth.
  • Despite de-dollarization narratives, the US dollar's share of international transactions via Swift is surging. Tyler attributes this strength to the US being the world's largest oil and gas producer and its strategic global dominance.
  • The Japanese Yen's break of the 160 USD/JPY level is a critical indicator. Such a move could trigger a dollar "wrecking ball" event, causing global credit problems and historically preceding NASDAQ peaks.
  • ESG popularity plummeted with inflation's return in 2022, indicating it was a "zero-rate phenomenon." This shift highlights a reversal in priorities, with energy security now prioritized over environmental mandates by institutions previously shunning oil and gas.
Also from this episode: (3)

AI & Tech (2)

  • Companies are aggressively pursuing AI-related capital expenditures to remain competitive, with Tesla projecting over $25 billion in capex this year. The semiconductor index is up 16 consecutive days, and Intel's earnings beat caused a 13% stock rise after hours.
  • Host and Quinn warn that while AI presents long-term growth, the short-term market is "rich" with high retail call option volume, often preceding reversals. Quinn advises against short-term options trading due to institutional advantages.

Social Media (1)

  • Google Trends data reveals a decline in OnlyFans interest concurrent with a surge in church attendance, particularly among young people in New York. This suggests a rejection of nihilism and a search for community.
#Fed#Macro#AI Infrastructure#Labor#Energy

Markets Are Misreading A Late Cycle Liquidity Crunch | Michael Howell • Apr 22

  • Michael Howell describes the global liquidity cycle as inflecting lower into a "speculation" phase, preceding "turbulence," a difficult period for risk assets. He forecasts flattening yield curves as liquidity diminishes.
  • Michael Howell defines global liquidity as money in financial markets, reflecting the balance sheet capacity of credit providers, distinct from real economy liquidity like M1 or M2. Central bank balance sheets are minor in the overall liquidity equation.
  • Michael Howell states money in financial markets and the real economy are distinct, with surpluses in one spilling into the other. The real economy typically lags the liquidity cycle by 15 to 20 months.
  • Michael Howell observes current economic data, including US ISM new orders and the Philly Fed index, show robust strength, contrary to media recession forecasts. He notes an AI-based model indicates the Iran conflict dented world growth by only 0.5-0.75%, significantly less than the 4% impact of COVID.
  • Michael Howell highlights a shift from Fed QE to Treasury QE, where the Treasury issues more bills, predominantly bought by banks. This mechanism effectively monetizes government spending, injecting liquidity and providing stimulus.
  • Michael Howell’s framework centers on markets as debt refinancing mechanisms requiring liquidity. He highlights the paradox where debt needs liquidity for rollover, while liquidity needs debt as collateral, noting 77% of global lending is collateral-based.
  • Michael Howell explains the Treasury uses buybacks to replace longer-dated coupons with shorter-dated bills, directly targeting the MOVE index to improve liquidity. A 10-point MOVE index increase correlates with a $28 billion rise in Treasury buybacks.
  • Michael Howell notes the Fed's "reserve management purchases" were a direct intervention, despite denials of being QE, to inject liquidity and curb repo spread spikes. He estimates bank reserves were about $400 billion below adequate levels by early December, leading to a $600 billion net change from trough to peak.
  • Felix Salmon and Michael Howell agree that decreasing the average duration of assets, like swapping long-duration instruments for shorter-dated bills, expands liquidity even if it's an asset swap.
  • Michael Howell questions the feasibility of returning the Fed's balance sheet to pre-2008 levels, citing a 5.5-fold increase in federal debt since the GFC and a halving of dealer capacity. He contends the Fed must retain its role as guardian of the bond market.
  • Michael Howell suggests asset allocation aligns with the liquidity cycle: commodities thrive at the peak (speculation phase), equities during abundant liquidity, cash in downswings, and government bonds at the cycle's bottom. He projects global liquidity will bottom around 2027.
  • Michael Howell contends that rising commodity prices, particularly oil, often destroy liquidity and mark the end of a cycle. He cites the historic counter-cyclical relationship between commodities and bonds as evidence.
  • Michael Howell, referencing Henry Kaufman's taxonomy, states the "speculation" phase is marked by a "bear flattening" yield curve, where short rates rise faster than long rates, a shift from the prior "calm" phase of bear steepening.
#Macro#Banking#Fed#Markets#Energy
Breaking Points with Krystal and Saagar
Breaking Points with Krystal and Saagar

4/22/26: Fed Chair Nominee Grilled, Data Center Revolt, CIA Officers Die In Mexico, VA Redistricting • Apr 22

  • Kevin Worsh, Trump's pick for Fed chair, faced Senate grilling over his independence from presidential influence and his failure to disclose over $100 million in assets, which he promised to convert into 'vanilla' assets if confirmed.
  • Saagar noted that US consumer confidence is at a 'record low,' a trend that preceded the recent war in Iran and reflects a different public perception of the current presidency compared to the first Trump presidency.
  • A proposed Google data center in rural Ohio, planned for 800 acres, faces local opposition due to concerns over its high water consumption, potential power bill increases, and noise, despite promises of tax revenue and 50 permanent jobs.
  • Polling on tech companies has shifted dramatically, with Saagar observing that Trump's early support for AI data center build-outs now leaves Republicans on the ballot facing a potentially unpopular part of the GOP agenda.
Also from this episode: (6)

Politics (4)

  • Wandavid Rojas reports that two CIA officers died in a suspicious car accident in Chihuahua, Mexico, while allegedly training Mexican officials on drone use for methamphetamine lab destruction, with evidence reportedly destroyed by fire.
  • The CIA's counter-narcotics role in Mexico expanded after Trump designated Mexican cartels as foreign terrorist organizations, granting the agency more leeway to operate there, though its involvement in this specific operation is contested by Mexican officials.
  • Wandavid Rojas noted that Shinbaum's administration in Mexico has seen a 15% drop in homicides in its first year, an unprecedented achievement since the 2006 drug war, alongside significant decreases in fentanyl flows and record seizures.
  • Hakeem Jeffries celebrated Democratic success in a 'jerrymandering war' against Republican efforts, citing wins in California (Prop 50) and Utah, while criticizing Ron DeSantis's special session to redraw maps in Florida.

Elections (2)

  • Virginia voters narrowly approved a redistricting measure (51.5% to 48.5%) that is expected to redraw the state's congressional delegation from six Democrats and five Republicans to a heavily skewed ten Democrats and one Republican.
  • Ryan reports that Philadelphia congressional candidate Alice Stanford is receiving money from APAC, with nearly $30,000 tracked through Democracy Engine, despite her public denials and controversial comments about accusing Israel of genocide.
#Fed#Macro#AI Infrastructure#Diplomacy

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