AI Is Propping Up the Economy. The Fed Could Break It.

The guest links energy-driven inflation to policy and cross-border risks: he argues that a Fed rate hike cannot produce more oil, while a proposed U.S. diesel ban could disrupt supplies to Japan, which imported 37% of its diesel from the U.S. in July. He warns diesel was nearly 100% more expensive than a year earlier and that disrupting those imports could trigger a chain reaction.

The guest sees rising yields as a growing pressure point for both the economy and federal finances: higher yields could strain an already weak housing sector, and he estimates each 1% parallel shift up in the yield curve adds $120 billion to the annual U.S. deficit. He also says the Middle East oil crisis has reduced the administration’s control over yields, helping explain why the 10-year yield did not retreat near 5% as it historically had.

The guest warns that leverage could make a fragile economy and markets vulnerable to a sudden unwind, while acknowledging it is unclear where accumulated pressure will break. He cites the 2024 yen carry-trade unwind as an example of how difficult it is to identify concentrated leverage before it triggers a market shock.

The guest says AI is supporting equity-market resilience amid rising 10-year yields, even as he considers equities expensive on a cyclical P/E basis. He describes exceptionally large AI spending—including Meta’s projected capex exceeding every country’s defense budget except the U.S.—but flags infrastructure overbuilding and data-center resistance as uncertainties that could constrain hyperscalers’ spending.