As we’ve discussed in my last few notes, the Fed has been a significant headwind on economic growth.

They followed a policy mistake that exacerbated forty-year high inflation, with another policy mistake that has harmed the labor market and suppressed an economy that should be on fire — driven by a technology revolution, fiscal and industrial tailwinds, and a productivity boom.

But now the Fed has turned the liquidity spigot back on, and is finally lifting the restriction on the economy (with more cuts coming next year).

Even better, the hot productivity gains from AI are fueling non-inflationary growth.

With all of this, as I’ve said, after the massive money supply growth of the past five years, we should be getting a much bigger “bang for our buck” in economic output. 

How much bigger? 

For that  answer, let’s revisit some of my analysis of the long-term path of GDP. 

 

This chart shows us the path of a 3.6% annualized growth rate (the U.S. long-run average from 1929 to 2008).

The orange line represents where real GDP would be if we had stayed on that long-term trend after 2008.

The blue line is the actual path of the economy.

As you can see, we were knocked off path during the Great Financial Crisis (GFC), and have never recovered. 

What can we attribute this gap to?

Looking back through history, post-recession economic recoveries are typically driven by an aggressive (“V-shaped”) bounce-back in growth, to return the economy to trend growth.

We didn’t get it.

Instead, the post-Great Recession growth environment was dangerously shallow and slow — and then we had covid (another set-back). 

And here we are, seventeen years after the depths of the GFC, after loads of fiscal and monetary stimulus (a tripling of money supply), and the economy has only mustered 2% growth over the period.

The result of that growth malaise is the gap you see in the chart above: A $7 trillion hole in the economy.

What would it take to get GDP back to trend by 2028 (the end of Trump’s term)?  

It would take 14% annualized real growth.

Sound crazy?

That’s exactly the kind of growth we had in the early 40s. 

 

What are the parallels between now and then?  

Here’s what the most advanced AI model says (Gemini 3):  

We are currently in a period that mirrors the 1938–1944 transition in several fascinating ways:

A. Coming Out of COVID vs. Coming Out of the Depression

The “Coiled Spring” Effect: Just as the 1930s created massive pent-up demand and idle capacity, the COVID lockdowns created a “coiled spring” of consumer savings and forced digital transformation.

Fiscal “Shock and Awe”: The COVID stimulus packages (CARES Act, etc.) were the modern equivalent of the New Deal, but on an even larger scale relative to time. They prevented a total collapse, setting the stage for the current “high-pressure” economy.

B. The Ukraine/Russia War & the “New Cold War”

Industrial Re-Mobilization: Much like 1940, the West is realizing its “industrial base” has withered. Spending on Ukraine is acting as a backdoor stimulus for the U.S. defense sector, forcing a rebuild of manufacturing lines for artillery, drones, and missiles.

Geopolitical Re-alignment: World War II ended “isolationism.” Today’s conflicts are ending “hyper-globalization,” leading to “friend-shoring” and a return to domestic industrial policy (like the CHIPS Act).

C. The AI Infrastructure Boom: The New “War Effort”

Scale of Investment: Some analysts call the AI build-out a “civilian Manhattan Project.” Microsoft, Google, and Meta are spending hundreds of billions on data centers.

Energy Mobilization: Just as the New Deal’s TVA (Tennessee Valley Authority) brought electricity to the rural South to power aluminum plants for warplanes, the AI boom is forcing a massive, government-backed mobilization of the power grid (nuclear, solar, and gas).

Productivity Frontier: If WWII was about the mechanization of the world, the AI boom is about the automation of intelligence. Both represent a “step-change” in what a single hour of human labor can produce.

We got the November jobs report this morning. 

For the better part of the past two years, this has been the spot to watch, as a condition for a Fed policy response: “cracks in the labor market” = rate cuts.

But even with a jump to 4.6% in the unemployment rate, the market’s reaction was muted. 

Why?  Because the Fed effectively front-ran this report last week.

Remember, Jerome Powell matter-of-factly revealed that the job growth reports are, and have been, overstating 60k (or so) jobs a month — not just in the annual revisions, but an ongoing “systematic overcount” (in his words).

He went on to say that inflation is in the low 2s, once you exclude what they now view as one-time price increases from tariffs.

These statements are an admission of a policy mistake. The Fed has been holding real rates unnecessarily high, while the labor market has been “cracking.”

This leads us to the second reason the market reaction was muted today:  The Fed has already resumed the money printer. 

They didn’t just restart pro-liquidity operations last week — just eleven days after ending a campaign of liquidity extraction — they did so in size ($46 billion in planned Treasury purchases over the next four weeks).  And they did so with the explicit signal that they would pump liquidity into the system into perpetuity.

So, in typical Fed fashion, they pivot from a policy error, with no apologies.

That brings us back to my note last week, ahead of the Fed meeting. The Fed has been a headwind to growth, not only because inflation was sticking above their target, but because they believed economic growth, running above their view of the “new normal” (1.8% — their long-run projection) was inflationary.

On that note, we have another unapologetic admission of error from the Fed Chair last week.  After spending the past two years barely talking about productivity, and reluctant to give credit to AI as a productivity driver, he said “we’re definitely seeing higher productivity,” and “it makes people who use it more productive.”

That matters because productivity is a key ingredient that can solve a lot of problems.

As we’ve discussed often in my daily notes, hot productivity gains promote wage growth, which is needed to reset wages to the increased level of prices (which restores quality of life). 

And it can fuel wage growth without stoking inflation. 

Jerome Powell himself argued this back in 2016 at the Peterson Institute (here): higher productivity growth is the driver of higher long-term potential growth. 

So, they should not have been surprised by the current 3%+ GDP growth, and tame inflation.

That said, as we discussed last week, 3% real GDP growth is “average” in average times (5%-6% nominal growth).  But it’s probably recession, in an economy that’s still digesting $7 trillion of money supply growth in five years (over 40% M2 growth).

We should be getting a much bigger bang for our buck.  And now that the Fed is getting out of the way, we may finally get it. 

Over the past month, we’ve talked about some pro-liquidity clues dropped by the FOMC Vice Chair, John Williams. 

In early November, he signaled to markets that the Fed would be prepared to expand the balance sheet again to avert any 2019-like liquidity shock.

Remember, in this 2019 analogue, the Fed made three consecutive quarter point rate cuts, and returned to expanding the balance sheet to respond to “strains in the money markets” (i.e. tightening liquidity conditions). 

Stocks did this …

   

As the former Fed Chair, Ben Bernanke once said, QE tends to make stocks go up.

Fast forward to today, and the Fed just made a third consecutive quarter point cut.  And right on cue, they returned to expanding the balance sheet again — to the tune of $40 billion a month (a “big” amount, in Powell’s own words).

Just like in 2019, the Fed is playing the semantics game — the asset purchases are “not QE” but “reserve management.” 

So, what’s going on?    

As we discussed earlier this year, in my March 24th note, the Fed had just dialed down the rate at which it was shrinking its balance sheet (quantitative tightening) from $25 billion to just $5 billion a month.  That was a sharp reduction, to a small amount, which meant they have effectively ended QT. 

Something was up. 

And once again, it was attributed to stress in money markets: “signs of increased tightness in money markets.”

This was the first clue that something in the financial plumbing was, again, breaking, and a Fed response is coming (including QE).

Here we are, nine months later, and the Fed is back to aggressively expanding the balance sheet again.

With that, as we’ve discussed many times in this daily note over the years: we’ve yet to see an example of a successful exit from QE (anywhere). 

Until proven otherwise, it’s Hotel California — “you can check out, but you can never leave.”

Perhaps the most important takeaway from today’s press conference was Powell’s admission on the “secular ongoing growth of the balance sheet.” 

He explicitly said, maintaining constant reserves, “calls for us to increase about $20-$25 billion dollars per month.”

Did the Fed Chair just admit the U.S. economy now requires the Fed to print $250-$300 billion a year, forever, just to tread water? 

That’s what he said.  And they’re going to ramp that number even higher over the coming months, just to be safe.  

So, the liquidity hose is now officially back on.

Powell also noted that rates are no longer “restrictive” but within the range of “neutral.” The headwind is gone (at least in the Fed consensus view).

Combine all of this with the fiscal side — with Trump floating $2,000 checks in the mail — and you have a massive green light for asset prices.

Finally, we have the geopolitical kicker.

The EU is stepping closer to monetizing frozen Russian assets.  This effectively breaks the seal on sovereign asset confiscation.

With that, we have this confluence of monetary debasement and global confiscation/distrust.  That’s a formula for much higher hard asset prices (particularly gold). 

 

The Fed kicked off this easing cycle back in September of last year.

And assuming no surprises tomorrow, they will have since cut rates by 175 basis points, to the range of 3.50%-3.75%.

When they started this cycle, the Fed Funds Rate was 283 basis points ABOVE the rate of inflation (PCE).   

As of tomorrow, it will be about 83 basis points above the rate of inflation — still restrictive, a headwind on economic growth.

When they started this easing cycle, the yield curve (10-year yield minus 2-year yield) was just returning to a positive slope, after two years of inversion.

And as we discussed at the time, yield curve inversions are historically predictors of recession.  And when the curve turns positive again, it tends to indicate an economy has either entered or is about to enter recession. 

But we haven’t had a technical recession (two consecutive quarters of GDP contraction).  Instead we’ve had an economy that will have probably grown at an average annual rate of around 2.5% by year-end.  Keep in mind, that’s growth above what the Fed thinks is the long-run potential of the economy (which is 1.8%).

So, do they think 2.5%-3% growth is excessive (above potential), and therefore must be inflationary?  Is this why they maintain a restrictive stance?  

It seems that way.

But also keep in mind, 3% real GDP growth is “average” in average times (5%-6% nominal growth).  And it’s probably recession, in an economy that’s still digesting $7 trillion of money supply growth in five years (over 40% M2 growth).

As we’ve discussed over the past few years, here in my daily notes, we should be getting a much bigger bang for our buck.  But the Fed has been, and continues to be a headwind to growth.

The Nasdaq is now ticking back toward the late October record highs.

This, after a 10% technical correction (peak-to-trough in the Nasdaq futures), accommodated by a story that conveniently fit the price.

After a flurry of deals between Nvidia, the hyperscalers and OpenAI, it became obvious that Nvidia was making meaningful investments into the ecosystem that would ultimately drive more demand (more revenue) for Nvidia GPUs.

Was it a shell game, moving money from one pocket to another? The signs of hubris we’ve seen in past bubbles?”

As I said in my November 3rd note (here):  In this case, it looks more like a feature of the AI infrastructure boom, not a bug.

It’s coordination across big tech, which accelerates the infrastructure build.  And that only widens the competitive moats.

For OpenAI, which is inherently at risk of losing ground to model commoditization, these deals give them the competitive advantage to widen the lead in scaling global AI usage — plus the cloud companies now have an incentive to see OpenAI stay relevant.

With that in mind, the past two months have shown that the competitive edge in AI is shifting from “who has the best model” to “who has the capital to lock down computing capacity.”

That’s why the IPO discussion is heating up.  There were reports today that Anthropic and OpenAI are looking to go public in 2026.

When the “price of staying relevant” becomes tens of billions of dollars — to hire and retain talent, secure GPU supply, reserve data center capacity, and fund power build-outs — the private market eventually hands the baton to the public market.

If we look at the parallels between the current environment and the late 90s technology revolution, we should expect a boom in IPOs.

Here’s a look at the volume of IPOs in the late 90s.  Importantly, the biggest surge came early, in 1996.  The frenzied return chasing came late, in 1999.

And let’s revisit how the late 90s IPO boom influenced the Wall Street kings of underwriting.

Here’s JP Morgan …

And let’s revisit how the late 90s IPO boom influenced the Wall Street kings of underwriting. 

Here’s JP Morgan … 

Citibank …

Morgan Stanley …

And no one was responsible for more IPO underwriting volume in that era than Goldman Sachs.  And they went public in 1999, in the height of the frenzy.  The stock went up 60% in 10 months, before the stock market topped in March of 2000. 

We went into the Thanksgiving holiday with the U.S. 10-year yield testing the important 4% level.

In our last note, we discussed a clean break below 4% as a potential tailwind for financial conditions — and a catalyst for the long-awaited narrowing of the performance gap between mega-cap tech and the rest of the market.

Historically, small caps tend to do better as policy moves from tight to easier. 

But despite the Fed’s current policy direction, the gap is still wide: the Nasdaq is up about 21% YTD versus 12% for the Russell 2000 (and only 9% for the equal-weight S&P).

That brings us to this week.  Yields are bouncing, not breaking lower.  And it’s not just the U.S. The move UP is global, and it’s being led by Japan.

Overnight, Bank of Japan Governor (Ueda) signaled the BOJ may resume rate hikes at the December 19 meeting.  With Japan still at near-zero rates, even small tightening matters, because Japan has been the world’s last major source of ultra-cheap money.

As that liquidity backstop fades, global yields can rise.  

On the policy path note, over the next three weeks we’ll hear from every major central bank.

As you can see below, most of the developed world is still in an easing posture — Japan remains the outlier, moving in the opposite direction.

Add to all of this, today also marks the official end of the Fed’s quantitative tightening (QT) campaign.  That means the Fed will now be watching liquidity conditions closely for the cue to pivot back toward balance sheet expansion again.  And if we listen to FOMC Vice Chair, John Williams, it will be “soon.”

So, bottom line: Despite the pop in global yields today, the Fed is set to deliver the fuel for stocks — another rate cut on December 10th plus balance sheet expansion coming “soon.”