Yesterday Jerome Powell delivered his last FOMC press conference — and he didn’t say a word about the balance sheet.

Not in the prepared remarks. Not in the Q&A.

Remember, in December the Fed ended its quantitative tightening program (shrinking the balance sheet/withdrawing liquidity from the system) and days later restarted another iteration of expanding the balance sheet/adding liquidity to the system (QE that the Fed wraps in different terminology). 

Since then, the Fed has bought $170 billion of Treasuries. And remember, when this program kicked off, Powell also said this:  “there’s a secular ongoing growth of the balance sheet. And that alone calls for us to increase about $20-$25 billion per month.”

So, it’s ongoing. Indefinitely. 

Now, this is in direct contrast with what Kevin Warsh, the incoming Chair, has said publicly about the balance sheet.  It needs to shrink.

So, the departing Fed Chair says QE forever, to maintain ample reserves in the financial system. The incoming Fed Chair says the opposite. 

One would think this would prompt some questions by the army of financial journalists in the room yesterday.  

Not a peep. 

Meanwhile, the same Fed that is quietly easing through the balance sheet, spent time debating the easing bias language in describing the path of interest rates. Three wanted it removed.

So, some were more hawkish on rates, but somehow fine with pumping $40-$50 billion a month in fresh liquidity via the balance sheet. 

And with all of the discussion about the inflationary pressures in the economy, none were attributed to the Fed’s asset purchases. 

So, why are they doing it? 

Is the departing Fed Chair pre-loading dollar liquidity for his global central bank friends, knowing that the incoming Fed Chair will no longer provide such liquidity without conditions (i.e. requiring alignment with the United States on policy)?

Maybe.

Consider this: Since the Fed restarted balance-sheet expansion in December, Europe has accounted for 98% of dollar swap-line usage. 

Clearly dollar liquidity in Europe is a pressure point.  That’s why European leaders have been openly concerned about this Fed regime change over the past few months, and have even talked about “pooling” dollar liquidity from other central bank partners around the world.

That said, when ECB President Christine Lagarde was asked this morning about the liquidity situation, she said, “we still have an abundance of liquidity.”

Better to watch what they do, not what they say.  

Yesterday we talked about the cleanest signal on the current state of AI demand.  That signal is oversubscribed data storage.

Indeed, the signal from Seagate earnings showed up in today’s earnings reports across the AI kings. 

They guided higher (either explicitly or implicitly). All four of them.

Google announced 2026 capex of as much as $190 billion, up from the $185 billion guide they gave just a few months ago, and said capex will “significantly increase” in 2027.

Microsoft upped 2026 spend to $190 billion and said remaining performance obligations ballooned to $627 billion, up 99% year-over-year. 

Meta raised its 2026 capex range from $115-135 billion to $125-145 billion.

Andy Jassy at Amazon said “the faster AWS grows, the more short-term capex we will spend.”  And then he said the AWS backlog for Q1 is $364 billion plus a $100 billion deal they just announced with Anthropic. That’s demand for compute. That means capex is going up. 

So, the capex fatigue thesis didn’t show up. Instead, it continues to accelerate. And it’s because the demand/the revenue is locked in. They just can’t build the compute capacity fast enough. 

But if there’s a chink in the armor, it’s that capex is starting to eat into free cash flow, until they can actually fulfill on the orders.

And it’s free cash flow that funds the huge buybacks the big tech stocks have done in recent years.

This is of particular interest because it ties directly into what the great macro trader Paul Tudor Jones said in an interview just published yesterday. He talked about the supply of stock coming down the pike with IPOs lining up on the docket. And he talked about the capex commitments from the hyperscalers “already eating into their cash flow.”

So, the broad “equity supply” will be growing, which means funding for the big IPOs will be coming out of existing tech stocks.

For those companies producing scarce inputs in the AI buildout or directly innovating to fuel the AI boom, the tailwinds remain. 

For everything else, capital will be rotating out and toward the IPOs (SpaceX, OpenAI, Anthropic …).

Google, Amazon, Microsoft and Meta report tomorrow. Apple on Thursday. The market has been waiting for some sign of capex fatigue for years now.  It hasn’t happened.

And there are no signs of it happening when they report over the next couple of days.

Remember, it was just earlier this year that Google doubled its expected 2026 capex to as much as $185 billion. Meta guided up to $135 billion for the year, a near double of what they spent last year.  Amazon announced $200 billion in capex.

And Andy Jassy said they were “monetizing capacity as fast as we can install it.”

It’s because the “always-on” inferencing phase of AI has arrived. Moreover, it shifted into an even higher gear since early February, as autonomous agents have exploded in numbers — running around the clock, executing tasks, managing workflows, transacting, calling other agents.

It’s a demand explosion.

Every agent is consuming compute, power, bandwidth, and storage — continuously.

This is why the hyperscalers have said they can’t build fast enough.

And maybe the cleanest signal on how it’s all going, is from the storage industry.

In fact, if we look back to early February, we talked about the “Nvidia moment for storage” — the point in time when the world realized AI demand for data storage is endless. SanDisk had just reported $3 billion in revenue and then guided for $4.4 to $4.8 billion the next quarter (a 50% sequential leap over just 90 days).

With that, we heard from Seagate today, one of the data storage kings.

Revenue was up 44% year-over-year to $3.1 billion. Record gross margins. Almost a billion dollars of free cash flow in a single quarter — the highest level Seagate has reported in over a decade.

But here was the bigger takeaway: Seagate told us that the top three global cloud providers have nearly doubled their remaining performance obligations to $1.1 trillion.

That’s the future revenue that enterprises and developers have already contractually committed to those cloud providers, primarily for AI infrastructure. And it’s that number that’s taking down Seagate’s storage capacity all the way through calendar 2027.

They are sold out.

Seagate’s CEO described what is happening as the “inference inflection.” He said compute infrastructure is shifting from periodic training to becoming engines that continuously generate mass capacity data.

Agentic AI is the new demand driver (continuously ingesting inputs, generating reasoning, and storing output). Physical AI will take it to yet another level. AI robots create massive amounts of data that needs to be stored, retained, and reused, making storage demand continuous.

So, this sets the stage for tomorrow. If the top three cloud customers have committed $1.1 trillion in future revenue and are scaling AI capex into the infrastructure that fulfills it, then Google, Amazon and Meta should be guiding higher on capex, not lower.

They should be confirming that AI demand is accelerating, not stabilizing.

This is the thesis we’ve been building our AI-Innovation Portfolio around since June 2023. Endless demand drives outsized value in the companies that provide the scarce infrastructure resources in this fourth industrial revolution. Join us here, or click below for more details on how we’re positioned and why.

In my last note, we walked through how the coming Fed regime change puts Europe under the gun.

We talked about how the screws turning on the ECB could be the catalyst for political change in Europe — and realignment with the United States, away from China, away from the “third pole” posturing.

Just days later, the European leadership is showing desperation.

France’s Macron flew to Beijing, spent six hours with Xi, and on the flight home told reporters that Europe should break from the United States, stop depending on the dollar, and become its own “third superpower.”

Marco Rubio responded by publicly stating that if Europe refuses to align with the U.S. on Taiwan, the U.S. will withdraw from Ukraine.

And then today, German Chancellor Merz went on camera and said the U.S. campaign in Iran is “ill-considered,” that the Americans have “no convincing strategy,” and that “an entire nation [the U.S.] is being humiliated.”  This is the same guy who, early last week, said “every man knows we cannot defend ourselves by our own strength.”

What’s going on?  

To answer that, let’s revisit an excerpt from a year ago (my May 7th, 2025 note) …

Pro Perspectives – May 7, 2025

“… restoring U.S. influence with Europe hasn’t worked.  The Trump efforts to end the Ukraine-Russia war have been met with pushback from Europe.

 

They’ve responded with the 800 billion euro plan to ‘re-arm’ Europe, in what seems to be an effort to support a continuation of the war. 

 

The trillion-dollar question is, who will fund it? 

 

Well, who’s looking for a new market to direct its excess manufacturing capacity toward, while also supplying the cheap credit to buy their stuff?

 

China. 

 

… with the U.S. looking to end the multi-decade wealth transfer to China, China may have a ‘plan B’ in Europe. 

 

Would the European Commission take the invitation to partake in China’s capacity dumping, credit fueling, industry gutting economic partnership? 

 

We may find out in the coming months.” 

With a liquidity crisis coming down the pike in Europe (accelerated by the energy shock), this time without the backstop of the world’s most powerful central bank (the Fed), the Brussels political class has only two paths.

Path 1) They can align with Washington, which would mean admitting that their policies — open borders, climate agenda, deindustrialization, energy dependence, dismantled defense capacity — destroyed Europe’s competitiveness.

If they do that, they relinquish their power grip, and likely end their political careers.

Path 2) They accept Chinese liquidity and solvency support in exchange for becoming the next debtor consumer market for Beijing.

Is the Macron trip and Merz rhetoric a clue on path 2 (at least trying to develop some negotiating leverage with Trump)? 

Trump’s strategy has seemingly been to squeeze them economically and financially (by the vulnerabilities of their own design) until the costs of the current leadership become unbearable, and the people of Europe deliver their own change of leadership.

That’s the political backdrop heading into two related central bank meetings this week.

The Fed meets Wednesday. This will be Jerome Powell’s last meeting as Fed Chair.

In the post-FOMC meeting press conference, will any of the esteemed financial media think to ask him about the nearly $200 billion of balance sheet expansion the Fed has done since December? Moreover, will anyone ask about Powell’s December declaration that ongoing $20-$25 billion a month would be needed indefinitely?

This, as the incoming Fed Chair (Warsh) just said last week that the Fed needs a smaller balance sheet. 

Then Thursday, we get the ECB.

Since the Iran strikes eight weeks ago, Europe’s rate picture has flipped. On Feb 27th, the market was pricing in a small chance of a rate cut, now it’s pricing in two rate hikes by year end.

But the ECB can’t resolve an energy-shock-driven inflation with rate hikes.

More likely, the energy shock comes with demand destruction, a slower economy, and harder times for the fiscally fragile countries in Europe. And with that, the ECB’s program that’s designed to defend the solvency of the fiscally fragile countries in Europe, will most likely be tested in the coming months.    

With a Trump-led Fed getting closer, let’s step through this framework we’ve been discussing all year — how the Fed plays into bringing Europe back into alignment with the U.S., and how the end game is isolating China.

In yesterday’s note, we talked about Kevin Warsh’s view on the Fed balance sheet — that it’s grown to the point where it’s become “fiscal policy in disguise,” and that it’s time for the Fed to get out of the fiscal business.

That’s regime change coming at the Fed.

And this should restore the important role of the market in disciplining the government’s tendency toward profligate spending. Market discipline means accountability, because market penalties mean higher rates (higher risk premiums).

So, as we discussed yesterday, this Fed regime change should bring fiscal discipline for the current and future governments (by design).

It should be good for the dollar, and dollar assets. 

And in the near term, it should clear the way for lower interest rates, because getting the Fed out of the government financing business should remove the structural reason rates are high (the fiscal profligacy premium).

With that, if we wonder where Warsh thinks rates should be, based on the economy, back in February, when he wasn’t holding anything back, he said “AI is going to make everything cost less,” and that “we are at the front end of a productivity boom.”

In fact, he said “we are probably in the early innings of a structural decline in prices.”

Now, this Fed regime change creates a serious problem for Europe.

We talked in our February 5 note (here) about how the Trump-led Fed exit from the QE era (and end to its role as the “global central banker to the world”) would put Europe under the gun.

Why? 

The ECB has been doing its own version of fiscal policy in disguise for the better part of a decade, buying the debt of fiscally vulnerable euro zone sovereigns to keep the doom loop from collapsing the entire system.

The difference is the Fed backstops the dollar, which is the world’s reserve currency. The ECB doesn’t have that privilege. And when the Fed steps back from its role as the implicit backstop of the global system, the ECB will be scrambling for the liquidity it needs to prevent its solvency problem from rearing its head.

The screws will be turning on the ECB.

And as we’ve discussed often in these notes, that reality could be the catalyst for political change in Europe — a populist shakeup, moving Europe back into alignment with the United States (away from China, away from the “third pole” posturing).

And then there’s China.

Today the White House and the House Select Committee on China moved in coordination to publicly frame Chinese AI model theft as a national security threat — and deployed the export controls against it.

Meanwhile the Wall Street Journal reports today that the Iran war has drawn down U.S. munitions stockpiles to the point where some officials are worried about a readiness for a different Strait — Taiwan.

As we’ve discussed, the ramp in the U.S. defense industrial base that’s been underway since early this year (to a planned 4 times the amount pre-Iran strikes) suggests that war capabilities are being sized for something bigger than Iran (i.e. China). The Pentagon announced Tuesday a $1.5 trillion budget request for 2027, the largest in U.S. history.

So, we have Fed reform coming at home. Dollar leverage over Europe. Industrial mobilization against China. All following the framework we’ve been discussing, and all in the same week. 

In my Monday note, we talked about the Congressional hearing transcript from Trump’s Fed Chair nominee (Kevin Warsh). More specifically, we highlighted the part where he said, Fed independence is about “operational conduct of monetary policy.” And it doesn’t span to “international finance.”

As we discussed, providing “access to dollars” (via swap lines) is a bargaining chip for the Trump administration (to incent policy and geopolitical alignment). And with this “international finance” reference, Warsh seemed to be indicating that’s a government and Fed collaboration.

Now, interestingly, this transcript is now officially on file with the Senate Banking Committee, just as it was written. But when he delivered it live on Tuesday morning, he didn’t read that international finance part.

So, of all of the contents of the speech, he didn’t want to draw attention to that very key point.

And as we’ve said, this dollar liquidity lever (international “access to dollars”) is something we should expect Trump, Bessent and Warsh to pull when Warsh takes the seat at the Fed officially next month.

It’s a powerful geopolitical carrot/stick to realign the world (particularly Europe) with American leadership, and to (related) deconstruct the global influence of the Chinese Communist Party.

With that in mind, what else did Warsh say?  

He said “we need a smaller central bank balance sheet.” The use of the balance sheet as a tool (i.e. expanding the balance sheet/quantitative easing) he described as an emergency tool, and only when rates are pinned to zero.

What is the current Fed doing? Expanding the balance sheet again.

Remember, back in December, within days of ending its program to shrink the balance sheet, the Fed flip flopped and started outright buying Treasuries again (pumping liquidity into the system).

They started with $40 billion worth of short-term Treasuries (what Powell himself described as ‘big’).  Nineteen weeks later, and the Fed’s balance sheet has already grown by $170 billion.  Moreover, back in December, Jerome Powell said the situation would require ongoing $20-$25 billion a month.

So, on the way out the door, the current Fed is pumping the balance sheet back up. And they have set expectations for the market, that a perpetual liquidity injection –– up to $300 billion a year, indefinitely, is required. 

Now Warsh is telling the Senate the Fed should be doing the opposite. They should be shrinking the balance sheet. They should get out of the business of doing “fiscal policy in disguise.”

If we listen to Kevin Warsh, the fiscal dominance that’s been funded by the Fed for the better part of the past 18years will give way to fiscal discipline.  

Yesterday we talked about the 1940s playbook, and how the formula driving the current U.S. economic boom looks a lot like the formula that drove the boom out of the Great Depression and World War II.

We’ve had the building of defense, energy, chips, supply chains, and data centers with wartime-like intensity.

And now we have a war.

But as we discussed yesterday, the scale of mobilization is bigger than Iran (bigger than Ukraine/Russia).  

And importantly, the 1940s didn’t end with just an economic boom.

It ended with Bretton Woods — a new monetary system. It was designed to underpin the American economic leadership we’ve had since. 

The IMF and the World Bank were created to support that architecture.

With that all in mind, Scott Bessent (U.S. Treasury Secretary) was on stage this week at “spring meetings” of the very institutions Bretton Woods created (IMF and World Bank).

What did he talk about? 

Post-World War II Europe and Asia, when the U.S. led the rebuild. And he said: “Why can’t we do that again?”

He’s talking about another era of American leadership, with growth at the center, leading to the spread of prosperity around the world.

Was this a clue about another Bretton Woods moment?

The war in Iran is restructuring energy. The confrontation with China is restructuring trade. The AI buildout is restructuring technology.

And once energy, trade, and technology have been restructured, the next question is: what about money?

For that, let’s revisit an excerpt from almost a year ago ...

Pro Perspectives – May 22, 2025

The U.S. is working on a solution that will create a distinct edge, relative to the rest of the world, in ensuring robust demand for its debt. 

The solution:  private, regulated, Treasury-backed dollar stablecoins.

The legislation on this will 1) shore up the dollar’s dominance in the world, AND 2) create a brand new, and very deep source of demand for U.S. Treasuries. 

Not only will this move by Congress ensure the dollar remains the world’s reserve currency, but the dollar will become the world’s digital reserve currency. 

So, people, businesses and governments from around the world will be able to own U.S. dollar stablecoins (effectively holding U.S. dollars) without the friction of opening a U.S. bank account or going through the U.S. financial system.  They get instant and virtually free (no wire fees, no spreads) access to the stability, trust and liquidity of the dollar. 

Through the dollar stablecoin, exposure to the dollar becomes instant, cheap and borderless.

We talked earlier this year about the wartime-like building of defense, energy, chips, supply chains and data centers.  

The wartime-like behavior of the metals markets.  

And the 40s-like boom parallels. 

As I said in my January 7th note, “just as the New Deal and WWII mobilization unleashed pent-up demand out of the Depression, today we have the convergence of post-COVID fiscal stimulus, re-industrialization, wartime defense production, and a Manhattan Project-like effort to win the AI race.“

That was before the Iran campaign. Before the naval blockade (before 171 tankers headed to the U.S. Gulf to load American oil).

And now, as of late this afternoon, the Wall Street Journal is reporting that the Pentagon is approaching GM, Ford, and other manufacturers to shift some capacity toward weapons production.

And keep in mind, the defense industrial base is already being ramped 4x — and that expansion started months before the first strike. 

That’s sizing for something bigger than Iran.

This looks like the 1940s playbook, where auto plants were making tanks. Consumer companies were making ammunition. Government spending poured into the economy, while the private sector boomed alongside it.

With that, we’ve talked over the past several months, about what the early 40s analogue would mean for GDP growth.

In the early 40s, U.S. GDP averaged 14% real growth. Unemployment went from 15% to under 1%.  And stocks boomed! The bottom decile small caps exploded higher: 63%, 143%, 71%, and 94% in consecutive years.

Remember, yesterday Jamie Dimon named the tailwinds driving JP Morgan’s $16.5 billion quarter: “increased fiscal stimulus, the benefits of deregulation, AI-driven capital investment and the Fed’s asset purchases.”

That’s the formula: Fiscal stimulus, Deregulation, AI capex, Defense spending, Re-industrialization, Energy dominance. The same forces that built American economic dominance in the 1940s are building it again.

The war in Iran restructures energy.

The confrontation with China restructures trade.

The AI buildout restructures technology.

So, it’s not a temporary war. It’s about structural change. And it’s following the playbook that built American dominance more than eighty years ago.

Stocks are at record highs because the market sees it. 

Yesterday, Goldman Sachs reported its second-best quarter ever.

Today, we heard from JP Morgan, Citi and Wells Fargo. All posted big numbers for Q1 — with almost $34 billion in net income across these four U.S. banks.

And Jamie Dimon (CEO of JP Morgan) attributed these U.S. economic tailwinds to the performance in the quarter:  “increased fiscal stimulus, the benefits of deregulation, AI-driven capital investment and the Fed’s asset purchases.”

That’s a formula for economic boom, articulated by the most powerful banker in the world.

Later in the morning, Scott Bessent (Treasury Secretary) spoke at the IMF/World Bank spring meetings and talked about the U.S. growth-focused agenda.

On Europe, he named the lack of sustainable growth as “the biggest risk to financial stability.”

And, related, he highlighted Europe’s energy problem. He said “the Europeans got into this terrible recursive loop” becoming dependent on Russian crude oil, to such an extent that they were financing the war against themselves through Russian oil purchases. 

On China, Bessent said it’s the global trade imbalances that represent the second biggest risk: “The world cannot take a China with a trillion dollar trade surplus.”

This is what we’ve been building toward in these notes for the past year.

The trade war was about drawing the world back into alignment with the U.S. and then isolating China. The Iran campaign restructured the energy architecture. And the Treasury Secretary is now saying, on the record, at the most important multilateral economic gathering of the year, that Europe’s model has failed and China’s surplus is unsustainable.