The AI Economy Is Leaving Labor Behind | Weekly Roundup

This episode reveals how the government-backed AI boom is creating a two-tiered economy, leaving Main Street behind and forcing investors to look beyond hyperscalers for the next wave of growth.

Fed Policy Whipsaw and Market Volatility

• The episode opens with an analysis of the extreme volatility in market expectations for the Federal Reserve's December FOMC meeting. The hosts note the market has swung wildly from a near-guaranteed rate cut to sub-40% odds, and then back again, all without any significant new economic data. This volatility was driven entirely by a series of hawkish statements from Fed speakers, followed by a dovish reversal from New York Fed President John Williams.
• This "whipsaw" action highlights how sensitive markets are to Fed sentiment, especially in a data vacuum.
• The speakers suggest the Fed was likely "buying optionality" by talking down the market's risk appetite, only to pivot back once financial conditions tightened too much.
• Tyler points out the danger this created, noting that credit markets, particularly regional banks and private equity, began to show signs of stress when the probability of a December rate cut dropped. This signals that the economy is at a fragile point in the credit cycle.

The Dominance of Market Structure Over Fundamentals

• The conversation shifts to the underlying drivers of market movements, arguing that systematic trading strategies and market structure now have an outsized influence compared to traditional fundamentals like earnings.
• Tyler emphasizes the importance of tracking three key flows: corporate buybacks, CTAs (Commodity Trading Advisors) who follow market trends algorithmically, and Volatility Targeting Funds that adjust exposure based on the VIX (Volatility Index).
• He explains that recent market action was a textbook example of these forces at play. As Fed speakers turned hawkish, the VIX rose, forcing volatility-targeting funds to deleverage and sell assets, which in turn triggered CTA sell orders.
• "If you plot these odds like in a line chart versus risk assets, it's just the same thing," one speaker notes, underscoring the market's singular focus on liquidity conditions dictated by the Fed.
• This structure creates predictable patterns. For instance, an inverted VIX term structure (where short-term volatility is more expensive than long-term) is a powerful buy signal, as it indicates systematic funds have over-hedged and will soon need to relever.

The AI Economy: A Government-Backed Manhattan Project?

• The discussion pivots to the AI sector, framing it as the primary engine of economic growth and a focal point of government policy. The hosts compare the current AI buildout to the Manhattan Project, suggesting it has become too big to fail.
• The speakers reference a tweet from David Sacks, who noted that AI capital expenditures now account for half of US GDP growth, implying the government cannot allow the sector to falter without triggering a recession.
• This has led to initiatives like "Project Genesis," which signals a government backstop for the AI industry, driven by geopolitical competition with China.
• However, this creates a risk. As one host cautions, when an industry becomes "too big to fail," it often becomes a regulated utility, which can make for poor long-term investments, similar to banks post-2008.
• The hosts draw a parallel between OpenAI's Sam Altman and FTX's Sam Bankman-Fried, pointing to the grand scale of their ambitions and the collective bystander effect where few are willing to question the narrative despite its seemingly unrealistic projections.

AI's Impact on the Labor Market

• The narrative then connects the AI boom directly to a deteriorating labor market, citing findings from the latest Fed Beige Book—a report summarizing economic conditions based on interviews with business owners.
• The Beige Book revealed that companies are using even modest AI deployments to eliminate jobs, either through attrition or by skipping new hiring classes for entry-level workers.
• This is corroborated by recent news, such as HP's announcement that it is cutting up to 10% of its workforce (4,000-6,000 jobs) as part of a strategic AI push.
• The hosts argue that while AI is delivering real productivity gains, the social contract is at risk of breaking. The national conversation is focused on the technological race rather than addressing the widespread labor displacement it is causing.

Investment Strategy: Shifting Focus from AI Beneficiaries

• Given the political and economic landscape, the hosts propose a new investment thesis for the coming year. The focus should shift from the AI infrastructure builders (like the "Mag 7") to the second-order beneficiaries and industries ripe for disruption.
• Felix frames the outlook through the lens of the upcoming election year. He argues that with Main Street struggling, the current administration will be forced to stimulate other parts of the economy to win reelection.
• "I think going forward there's still going to be tremendous winners among AI related thesis, but it's going to look a lot different," he states, suggesting the AI infrastructure trade is becoming crowded and utility-like.
• The real opportunity may lie in identifying stagnant, legacy businesses that can unlock massive margins by integrating AI. The analogy given is Western Union: instead of being replaced by stablecoins, what if it adopts the technology to leverage its existing brand and distribution network?
• Investors should also look further down the supply chain for bottlenecks created by the AI buildout, such as power procurement and commodities needed for data center construction.

Crypto's Role as a Wealth Equalizer

• The conversation explores crypto's unique position as an asset class for younger generations who feel locked out of traditional wealth creation.
• The hosts discuss the idea that Baby Boomers own the "balance sheet" (stocks, bonds, housing), while Millennials and Gen Z are left with the "income statement" (wages with little asset accumulation).
• In this context, crypto and other frontier assets (like quantum computing or AI startups) represent one of the few remaining avenues for asymmetric wealth creation.
• This makes crypto a politically potent issue. As the election cycle heats up, politicians may be forced to adopt a more favorable stance toward the industry to capture the votes of a generation seeking economic catch-up.

Future Fed Policy and the 2026 Outlook

• Looking ahead, the speakers anticipate a major shift in monetary policy after Fed Chair Jerome Powell's term ends. The market is currently underpricing the potential for significant rate cuts in 2026.
• The discussion centers on a potential Trump administration and the likelihood of a more dovish Fed chair, like Kevin Hassett, who would work in close coordination with the Treasury.
• The goal would be to shift credit creation away from the Fed's balance sheet (i.e., no more Quantitative Easing (QE)) and back to commercial banks.
• To achieve this, the Fed would aggressively cut interest rates while simultaneously easing bank regulations, such as the recently approved SLR (Supplementary Leverage Ratio) exemption for Treasuries. This would incentivize private lending and move away from the "acronym factory" of Fed intervention.

The Sneaky Bull Market in Gold Miners

• In a surprising turn, the hosts highlight the exceptionally strong performance of the gold mining sector, which is often overlooked by investors.
• Tyler notes that in Q3, 25 out of 32 gold mining companies beat consensus earnings per share (EPS) estimates. The sector saw a 56% quarter-over-quarter increase in free cash flow generation.
• Unlike previous cycles, these companies are now run efficiently, using their cash flow for significant share buybacks ($1.7 billion in Q3, up 13%).
• Margins are approaching tech-like levels of 55-60%, driven by a high gold price and moderating energy costs. This presents a compelling, under-owned trade in a world where central banks are diversifying away from US Treasuries.

Mike Green's Viral Piece on the True Poverty Line

• The episode concludes by discussing a viral essay from strategist Mike Green, who argued that the functional poverty line in the U.S. is not the official ~$31,000 but closer to $130,000-$150,000 per year.
• The piece resonated deeply because it captured the lived reality of many Americans struggling with the high cost of essentials like housing and childcare.
• Tyler shares his personal experience, stating, "My child care bill for three kids in daycare... was like $7,000 a month, right? That's way more than my mortgage."
• The visceral public reaction to the piece, both positive and negative, underscores the severity of the wealth inequality debate and the growing "burn it down" mentality. The hosts agree that structural policy changes are needed to address the widening gap between capital owners and labor.

Conclusion

This episode highlights the growing tension between a government-backed AI boom and a struggling Main Street. For investors, this signals a strategic shift away from mature AI infrastructure plays toward AI-enabled disruptors and alternative assets like crypto, which are gaining political and economic relevance ahead of a pivotal election cycle.