Welcome back to the deep dive. You know, the
sources you sent over this week, they present
really profound challenge. They really do. It's
like you're looking at two completely different
global realities at the same time. Exactly. On
one hand, you have these institutional firestorms.
I mean, high stakes political drama, huge constitutional
clashes over war powers. And this this really
surprising and sustained conflict with the Vatican
in all places. Right. And then on the other side,
you have the cold, hard economic data page after
page of Q4 2025 analysis from, well, basically
every major investment house. And it's not pointing
toward instability. It's pointing towards something
remarkably powerful, robust, and durable for
the economy heading into 2026. So that's our
mission today. We have to filter the signal from
all of this noise. How do we, as informed observers,
reconcile this just deafening political volatility
with financial analysis that points toward a
multi -year productivity -driven economic shift.
Yeah, it feels like a government in chaos and
an economy just in cruise control. It really
does. I think if we synthesize it, it's pretty
simple. The political volume knob is turned up
to 11, but the economic engine is just quietly
purring along underneath it all. OK. The foundational
story here is that the last couple of years were
all about building the raw AI infrastructure,
capital expenditure. The next couple of years,
that's going to be about diffusing that AI throughout
the whole economy. And that diffusion is what
generates the tangible productivity gains. Exactly.
Gains that politics. at least so far, hasn't
been able to disrupt. OK, let's start with that
political volatility first, because the headlines
are genuinely stunning. We have to begin with
the institutional limits being tested on presidential
power. Specifically around Venezuela. Yes, military
action in Venezuela. It's the ultimate test of
checks and balances, right? Right. We saw the
Senate advance this measure designed specifically
to limit the president's ability to wage war
within or against Venezuela without you know,
explicit approval from Congress. And this came
right after the president's public threats of
a second wave of strikes. Not to mention his
incredibly provocative comments about potentially
running Venezuela after capturing President Nicolas
Maduro. And what made this vote so significant
wasn't just the action itself, but... The internal
breach. Exactly. The breach in his own party.
It passed 5247, which meant five key Republicans,
Rand Paul, Susan Collins, Josh Hawley. They broke
ranks. They voted with the Democrats. That is
a powerful bipartisan statement. It really is.
It just speaks to the gravity of the constitutional
question. I mean, this wasn't some policy disagreement.
This was about the separation of powers. Hawley
explicitly cited the war clause. He did. And
Paul was so emphatic. He called the threatened
actions an act of war, plain and simple, arguing
the Constitution just doesn't grant the presidency
that kind of unilateral power. I remember Collins'
statement, too. She said that while she supported
capturing Maduro, committing more U .S. forces
without Congress was a constitutional line, she
just wouldn't cross. And how did the president
respond to this constitutional defense from his
own party members? Well, without restraint. He
just went on the offensive. Right. Bashing them
for their stupidity, saying they should never
be elected again. The real revelation, the thing
that made the sources we reviewed just pause,
was what he said when he was pressed on the limits
of his own power. Oh, this quote. Yeah. He said,
there is one thing, my own morality, my own mind.
It's the only thing that can stop me. And then
he doubled down and said he doesn't need international
law. My own morality, my own mind. I mean, that
is a staggering summation of the institutional
tension we're seeing right now. And it's not
just in Washington. No. Our sources point to
a parallel institutional conflict brewing with
the Vatican. With the arrival of Pope Leo XIV,
the first American pope, he's become a serious
ideological counterweight. And the conflict is
immediate. It's direct. Shortly after the president's
run -Venezuela comment, what does Pope Leo do?
He uses his Angeles address to call for safeguarding
Venezuela's sovereignty. And this seems like
just the entry point to a much broader conflict
with Maggi -aligned conservatives, doesn't it?
Absolutely. Pope Leo IV is wading into every
single culture war battleground. He's pushing
for humane treatment of migrants, and he's taken
action removing Cardinal Dolan from a key post,
replacing him with a much more progressive bishop.
He's also been openly critical on climate change,
right? Oh, yeah. He even blessed a chunk of Greenland
ice for dramatic effect. And he's taken a more
tolerant line toward LGBTQ plus Catholics and
a much harder line against the death penalty.
It's fascinating. The one critic the president
has to hold his fire on is the one who's elected
for life. Precisely. For all the deep ideological
clashes, the president has shown, well, unusual
restraint toward Pope Leo. And the sources are
clear why. The voting bloc. Catholics make up
a massive 22 % of his electorate. He just cannot
afford to alienate them, even if many Magier
Catholics disagree with the perp on some of these
issues. And it's the final point here on the
political friction. Pope Leo is 70. He's healthy.
and he's elected for life. He has a very long
runway to shape Catholic politics. Time is definitively
on his side. He can exert influence well past
this presidential term. OK, so that's the intense
political arena. You've got institutional friction,
constitutional crises, global ideological clashes.
Given all of that, the real question is, is the
economy even paying attention? Let's pivot to
the Q4 2025 economic landscape. Right. And the
consensus among all these investment reports
is just crystal clear. The economy is fundamentally
strong and it's driven by a generational shift.
From the capability phase of AI to the diffusion
phase. Exactly. We're moving from building the
tools to actually implementing those tools economy
-wide in factories, in offices, in logistics,
everywhere. And the investment needed for that
diffusion is Well, it's staggering. How do the
sources actually quantify this AI plus capex
boom? It's the key metric. They call it the Trump
investment boom and they measure it at five percent
of GDP in its peak year. Five percent. Put that
in historical context. That's huge. It's one
of the largest economic injections in U .S. history.
It's only behind the covid recovery stimulus
that was ten point seven percent and the railway
boom back in the 1880s, which was six point zero
percent. This is genuinely a top three capital
build out in over a century. That sounds enormous,
but. Is it sustainable? Are we just piling on
debt to make this happen? That's the most critical
insight in these reports. It is sustainable.
And the reason is that the U .S. non -financial
corporate sector is currently, and they put this
in all caps, very under -leveraged. So companies
can handle the spending. Easily. If you look
at the corporate debt service ratio, which just
measures how easily companies can pay their existing
debts, it's near a historic low in 2025. OK,
so debt loads are low. That's a great starting
point. It's better than great because the AI
CapEx is still being funded primarily by FCF,
by free cash flow. That's money companies actually
have on hand. They aren't relying heavily on
new debt yet. It makes this whole thing very
solid. And if we look at historical parallels,
the railroad, the automobile, What inning are
we in for this AI cycle? Well, the cycle really
kicked off in late 2022. If you track its trajectory
on a chart against those previous buildouts,
we are following that historical curve perfectly.
So there's still room to grow. Significant room
to grow before this cycle peaks. The sources
are suggesting several more years of aggressive,
high -value investment are still ahead of us.
It's a multi -year trend. OK, this is the data
point I find most compelling. productivity data.
We're seeing this sharp, really unexpected rise
in labor productivity growth in 2024 and 2025.
It is truly stunning. Productivity growth is
now approaching levels we haven't seen sustained
since the 1960s and the, you know, the dot com
boom of the late 1990s. This isn't just theory.
It's translating directly into corporate profit.
So let's zero in on those profit implications.
The sources compare output versus hours worked
in this post chat GPT era against the 1990s Internet
boom. What does that comparison tell us? It shows
this massive decoupling between production and
effort, which is the definition of a corporate
win. Since ChatGPT was released, output what
companies produce is up by 7 .9 percentage points.
Okay, and what about the labor input? Ours worked,
only up 1 .4 percentage points. So you're getting
almost six times the output for the extra labor
you're putting in. Precisely. The profitability
gains are just enormous because technology is
allowing output to surge without a proportional
increase in labor costs. It's the exact same
mechanism that drove that massive profit expansion
in the 90s. Which leads us right to the labor
market where the narrative has been so pessimistic.
I mean, people still worry AI is going to destroy
jobs. But the data we're seeing suggests the
opposite. AI seems to be enhancing value in high
exposure fields. So the dire predictions are
being undercut by the evidence? Strongly. Occupations
with high AI exposure, the ones that are supposedly
most vulnerable, they actually saw higher job
growth post -COVID, about 1 .7 % annualized.
What about wages? That's even more telling. They
saw vastly higher real wage growth, 3 .8 % post
-COVID versus a stagnant 0 .1 % pre -COVID. So
AI isn't killing these jobs. It's making them
more productive and therefore more valuable.
That's a critical nuance. But if we zoom out
to the overall unemployment picture, the rate
is creeping up. That's causing some concern.
It is. But if you look at the historical data,
this current cycle has seen the slowest increase
in the unemployment rate going all the way back
to 1950. And those surging corporate earnings
we just talked about, they're acting as an employment
buffer. Giving companies the financial cushion
to hold onto labor. Exactly. Even as productivity
surges. Yeah. And then you have to talk about
small businesses. They are the backbone of American
employment. Absolutely critical. They represent
something like 81 .7 percent of all non S &P
500 employment. And we are seeing a crucial forward
-looking indicator term positive. The NFIB Small
Business Hiring Plans Index, which tracks hiring
intentions, is starting to spike. It's near 20
percent now. That points to a strong labor future
as policy uncertainty starts to fade. And that
policy context is important. The sources highlight
that the daybreak push is expected to really
start taking hold in 2026. That's kind of the
final piece of the puzzle. When you combine reduced
regulatory friction with this sustained capital
investment boom, you get productivity, you get
better profits, and you get stronger employment.
And we're seeing it in the financial system,
too. The Slake Survey indicates lending standards
are loosening. OK, let's shift to the fixed income
market, because this feels like the junction
where the political volatility we started with
could actually create serious economic instability.
It's where the risk is, for sure. The market
seems stable, but that risk of politicization
is just enormous. Right. And first, just to set
the stage, that high -growth private credit market
that gets all the attention, it's still a sideshow.
It is not systemic compared to the, what, $48
trillion U .S. fixed income market? That's important
context. But it does seem like the tech sector's
reliance on capital might be moving beyond just
free cash flow. The spreads suggest that's happening.
U .S. investment grade tech credit spreads are
now at or slightly above the spreads for all
other sectors. That tells us the market anticipates
the AI buildout will soon need to tap debt markets
in addition to FCF. And how is this sudden productivity
boom confusing the Fed's math? Oh, productivity
booms confuse them every single time. It was
the same in the late 1990s. The sources highlight
the spiking disagreement among FOMC members about
the neutral interest rate, the Goldilocks rate,
the theoretical rate that neither stimulates
nor restricts the economy. And if the Fed can't
agree on what their steering wheel settings should
be, it just adds massive uncertainty for everyone.
So is the market telling the Fed what to do here?
It certainly appears to be signaling you're done
cutting rates. You can see that in the SOFR data,
which tracks short -term funding costs. But here's
the counterintuitive part. What's that? The 10
-year Treasury rate has actually increased since
the Fed began cutting rates back in September
2024. The cuts haven't lowered long -term borrowing
costs. Which brings us to the crucial political
risk. This is what connects the chaos in Washington
back to the economic stability. This is the foundational
vulnerability for 2026. What happens if the president
politicizes or interferes with the Fed's independence
to try and push for lower rates? History is exceedingly
clear on this point. Exceedingly clear. When
a national leader starts meddling with the central
bank, you can look at Turkey, Argentina, Sri
Lanka, Brazil. The result is universally catastrophic.
Every single time. Every single time. It leads
to a loss of market trust, which immediately
means higher interest rates and a much lower
currency value. We're not talking about a market
blip. talking about undermining the entire mechanism
of national stability. That's the risk to watch.
Thankfully, there is one anchoring factor that
suggests the market hasn't lost faith yet. Yes.
Inflation expectations are still firmly anchored,
and that is a great sign that the market trusts
the Fed will do its job, provided its independence
is maintained. OK, so let's wrap up with equities.
What does this strong fundamental foundation
mean for stocks, especially when you consider
the political cycle? There is a historical headwind
we have to acknowledge. The presidential cycle
suggests that 2026 year two, the midterm year,
is often tough for the S &P 500. Historically,
you see lower average and median returns. But
fundamentals usually beat cycles. They do. And
the market is fundamentally driven by profits
and nominal GDP growth. And both of those are
strong to quite strong right now. Corporate earnings
growth is outpacing revenue growth, which means
margins are expanding. And this rally is profit
driven, which makes it more robust than the dot
com bubble. Much more robust. And the big theme
investors have been waiting for, the broadening
out, we are finally seeing real evidence that
it's taking hold. So it's not just the big info
tech leaders anymore. No. While they've led for
years, traditional cyclicals are now starting
to lead the market higher. And crucially, the
Fed's right cuts are finally starting to benefit
smaller companies. S &P 600 small cap earnings
are rising. That strongly supports this broadening
outtrade that's expected to accelerate in 2026.
Which is great news for diversification. It is.
Okay, and let's end this section with that fun,
intriguing piece of skepticism from the sources.
The Time magazine superjinks. It's a great piece
of market trivia. Time featured the architects
of AI on its 2025 Person of the Year cover. And
the historical data shows what happens when Time
features a corporate leader or an industry like
that. The performance in the year after is not
good. Not at all. The stock performance of those
companies sees a significant average drop negative
25 .7 % on average, negative 7 .6 % median. It's
a classic sign of market top concentration and
a good reason to stay a little skeptical of the
biggest AI leaders, even with their amazing fundamentals.
That is a fascinating note to end on. OK, let's
synthesize this whole deep dive. The CAPEX and
AI build out is real, it's sustainable, and it
still has room to run. This investment is translating
directly to productivity gains we haven't seen
since the 90s, which means better profits and
stable employment. The Fed's probably done cutting,
which creates stability, and the market is poised
to broaden out. So what does this all mean for
you? It means you're navigating a world where
the noise from Washington and Rome seems deafening.
It's full of institutional challenges and threats
to executive power. And yet underneath all of
it, The engine of the economy is just quietly
humming along with 1990s level productivity growth.
The challenge is separating that high frequency
emotional political volatility from these durable
multi -year economic trends. And deciding which
door you prioritize. While the market signals
this beneficial broadening out to smaller companies
in 2026, the potential for a political clash
to destabilize global monetary policy is undeniably
real. So considering that stark historical data
on politicizing the Fed, which always leads to
economic catastrophe, is the core risk for 2026
really the natural cooling of the economy? Or
is it the potential erosion of institutional
independence? That's something to think about
as you follow these stories unfold.