Kaustubh Sule

Aahan Menon argues that because the private sector now owns a massive amount of US government debt, high interest rates are feeding cash into the private sector rather than sucking it out. 1. The Traditional Mechanism (How it Used to Work) Historically, "monetary policy transmission" relied on a simple pain channel: The Action: The Fed raises

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3. "Don't Fight the Train" Despite the long-term risks, Menon advises investors not to bet against this dynamic yet. As long as the CapEx spending continues to grow, the "profit juice" will keep flowing, keeping aggregate earnings per share (EPS) high and supporting the stock market. The signal to watch is not the level of spending, but the rate of

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2. The Mechanism: "Broken" Monetary Transmission The most critical insight here is how high interest rates have failed to stop spending and may have even boosted it for the wealthy. Traditional View: The Fed raises rates → borrowing costs rise (mortgages, credit cards) → consumers spend less → economy cools. Current Reality (The "Interest Income"

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3. The "Circularity" Trap Menon identifies a critical flaw in this setup: The current boom is circular and ultimately unsustainable. The Logic: Currently, companies are spending billions on AI (CapEx) hoping it will lead to massive future efficiency and sales. The Problem: For that investment to pay off, there needs to be end-market demand

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The "Old Economy" (The Bust): Reality: Outside of AI, traditional cyclical industries are contracting. Investment in industrial equipment, residential housing, and non-residential construction is falling. The Divergence: If you strip out the AI spend, the "real" business cycle looks like a recession. High interest rates are successfully crushing

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The "AI Profit Juice" (The Boom): Mechanism: Corporations are spending massive amounts on AI infrastructure (data centers, chips). In the immediate term, this CapEx is recorded as revenue for other companies (like NVIDIA or construction firms), boosting GDP and corporate profits instantly. The Accounting trick: Crucially, the cost of this

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It’s the most extreme divergence between consumer sentiment and the stock market in over 40 years. This next version of the chart shows the same data, but it’s measured in terms of how far they are off from their highs. We have look back at the early 1980s to find a similarly low sentiment reading while stocks were near their highs: This divergence

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starting from around 1980, the US kicked off a 40-year trend of lower interest rates from a very high level. This kept reducing the hurdle rate for valuing companies and other assets, resulting in structurally rising valuations. It also reduced the cost of borrowing to buy those assets, which incentivized taking out leverage and buying those

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Main Points • Re-Dollarization, Not De-Dollarization: Contrary to widespread predictions of the US dollar’s demise, it is experiencing a profound strengthening. This phenomenon, explained by the ‘Dollar Milkshake Theory’, is driven by massive capital inflows into US assets, sucking liquidity from the global system • A Second, Powerful Straw: US

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