The Fed Is Hiking Into a Growth Slowdown, and Europe Is About to Walk Japan's Devaluation Road
The Fed starts hiking as growth peaks, while the $300–400 billion of "stealth midterm stimulus" that propped up US consumption for the past year is now receding; Vincent Deluard argues Europe today is exactly where Japan was in 2012, and the only way out is currency depreciation.
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A unanimous hike the market still hasn't caught up to
The biggest surprise for the hosts was the unanimous vote. Vincent Deluard admits he had expected a "dovish hike" and expected Kevin Warsh to stumble at the press conference — he was wrong on both counts. He describes the meeting as looking and sounding hawkish, and gives Warsh credit, saying his answers felt more improvised than Yellen's. On the market side, rates markets are currently pricing roughly four more hikes through the middle of next year, while the Fed's own dot plot guides to clearly fewer — a sizable gap remains between the two.
— Vincent DeluardThe $300 billion stealth midterm stimulus is receding
Quinn breaks out the forces that supported 2026 US consumption: OBB tax-refund stimulus, near-record SPR releases holding down oil prices, and a massive wave of tariff refunds paid out in an extremely short window squeezed in before the midterms. Vincent adds a fourth on top of that — accelerated depreciation from AI CapEx buildout, which cut corporate income tax receipts by roughly $100 billion. Together the four add up to roughly $300–400 billion, which he calls "stealth midterm stimulus." The key is that all of it is one-time and highly politically timed to November; after the midterms, a divided Congress means less political capital to push anything big.
— Vincent DeluardHow much of corporate earnings is fiscal stimulus
Vincent draws the inference most hostile to US equity valuations: the market credits the entire earnings surge to AI-driven productivity, but a substantial chunk of it is really fiscal transfers turning directly into profits. Tariff refunds go straight to the income statement, and personal tax refunds get spent almost immediately. He estimates that of the $400 billion, roughly half — around $200 billion — became profits, and given the scale of total US corporate profits, that is close to a double-digit-percentage contribution. In other words, a significant part of the earnings growth currently underpinning the market rests on fiscal stimulus that most likely will not be renewed next year.
— Vincent DeluardReal wages have been negative for six straight months
Vincent offers a fact he thinks is being ignored: before the Iran war, real wages were still growing 1% to 2%, then turned negative and have now been falling in real terms for about six consecutive months — and that is against the backdrop of those hundreds of billions in stimulus. He offers two readings. The optimistic version is a Greenspan-style productivity story plus "fear of the machine": people are afraid of being replaced by AI so they don't dare ask for raises, the Phillips curve shifts, and inflation really is transitory. He himself leans toward the pessimistic version: the wealth effect keeps people from demanding money over the summer, but once the holidays end, the barbecues are over, they see prices rising on everything and their savings are depleted, wage demands will come, and the K-shaped shock will pass into wages and then into services.
— Vincent DeluardWhether this counts as a policy error depends on your definition
The host asks: with the 10-year at 5% and diesel prices high already hitting demand, does the Fed really need to actually hike? Vincent's answer is that it will definitely have an effect, and not a good one, but he thinks you can only call this hike a policy error if you also call all the prior interventionist policy a policy error. His logic: without intervention in the currency, bond and commodity markets, the market would have corrected itself through falling stocks and the AI bubble deflating, and a hike would never have been on the table. Quinn adds that even if it is an error, it is a forced error — the market left Warsh no choice, and doing nothing would be worse.
— Vincent DeluardWhy three sworn rivals suddenly all want regulation
The host asks: why did the CEOs of three frontier labs that can't stand each other all converge on strategy and regulation over the same weekend? Vincent quotes Adam Smith — put three industry leaders in the same room and they will soon reach a consensus to divide the market. He gives a more specific motive: running frontier models keeps getting more expensive, and Anthropic's IPO is right in front of them, a $3 trillion prize close enough to almost touch. Quinn sees it more as several different incentives converging at the right moment: Anthropic has IPO and regulatory-capture motives, OpenAI's reported IPO delay is actually harder to explain, and Elon's model currently ranks third, so slowing the frontier benefits him.
— Vincent DeluardEurope today is exactly where Japan was in 2012
Vincent calls this a big macro call that could last a decade, and analogizes it to the yen depreciation after Abe — a depreciation that ran 15 years and completely transformed Japan's economy and capital markets. He thinks Europe today is very close to Japan in 2012: Japan leads Europe by ten years on demographics, and by the early 2010s Japan had already been through nearly three decades of deflation and half-hearted QE, before the whole country woke up and decided to slam the yen down at any cost. The core variable is the terms of trade — how much imports your exports can buy back. China simultaneously pushing down industrial export prices and pushing up raw material prices is the same shock for Japan and Europe, only Japan hit it first.
— Vincent DeluardJapan's 15 years of depreciation actually worked
Vincent stresses this is what many yen bears fail to understand: Japan fixed its house. The yen depreciated more than 50% in nominal terms, close to 65% including the inflation differential, and the result is that the primary budget is already balanced and tax revenue is growing at 6%. Judging a debt crisis comes down to R minus G — the gap between interest costs and tax revenue growth. In Japan, G is greater than R, so there is no debt crisis; netting out central bank holdings, Japan's debt-to-GDP has already fallen from 200% to 150%. France, by contrast, has G near zero and R at 4% and rising, making its R-minus-G equation far more fragile.
— Vincent DeluardThe UK is the best hedge against this European crisis
Vincent's contrarian trade is the UK. The reasoning: everyone hates the UK, even the British hate it — UK private-sector defined-benefit pension allocation to UK equities has fallen from 50% to 5%, and he says he hasn't seen this degree of self-loathing since the Brexit referendum, and after 50 to 5 you don't go to negative 45. The UK index happens to be concentrated in the three sectors he likes: energy, healthcare and financials. On top of that, the UK has only one central bank, giving it far more policy flexibility than Europe, and "Britain always leads continental Europe by ten years" — Brexit came before Trump. He admits the UK won't be immune, but thinks it is further ahead than continental Europe, making it a fitting pair trade that is highly correlated with Europe but better.
— Vincent DeluardIn their own words · checked verbatim
Let me start with a bit of public humiliation and say that I expected a dovish hike. And I expected Kevin Warsh to fumble the press conference. And the truth is I was wrong on both counts.
Vincent Deluard2:04
So you put it all in, you have about 300 to 400 billion of, let's call that the stealth midterm stimulus.
Vincent Deluard11:27
So a good chunk of that, of that earnings growth that's really supporting the market right now is on the back of fiscal stimulus that is waning and will probably not be renewed next year.
Vincent Deluard12:31
So now we're looking at six months, I think, of negative real wage growth.
Vincent Deluard16:42
But take that away. I think the default should be stagflation.
Vincent Deluard20:47
There's a $3 trillion prize and it's so close. You can almost touch it.
Vincent Deluard33:32
What in the world makes you think that productivity is going to increase? I mean, if anything, it's going to slow down.
Vincent Deluard38:43
When you've gone from 50 to 5, you don't go to minus 45 after that.
Vincent Deluard1:00:55
Figures
| Hikes priced by the market (through mid-next year) | about 4 | 4:09 |
| Size of this meeting's hike | 25 basis points | 7:15 |
| Change in SPR release pace | from $40 billion a month to zero | 9:22 |
| Corporate income tax foregone from AI CapEx accelerated depreciation | about $100 billion | 11:27 |
| Duration of negative real wage growth | about 6 months | 16:42 |
| Nominal yen depreciation (since 2012) | more than 50% | 39:44 |
| Japan debt/GDP (after netting out central bank holdings) | from 200% to 150% | 40:51 |
| Change in UK pension allocation to UK equities | from 50% to 5% | 1:00:55 |
Glossary
- terms of trade
- How much imports your exports can buy back; deterioration means a country's standard of living is passively squeezed.
- R minus G
- The core test of debt sustainability: when interest costs exceed tax revenue growth, debt spirals out of control.
- regulatory capture
- Industry leaders actively push for regulation, using compliance thresholds to lock out newcomers.
- SPR
- US Strategic Petroleum Reserve; releases can hold down oil prices short-term, effectively a subsidy to consumers.
- dot plot
- The anonymous distribution of Fed members' expected future rate path.
How to listen
Macro investors watching the Fed's path, US earnings quality and European asset allocation; anyone who wants to understand how "stealth fiscal stimulus" feeds into earnings judgments.
The midterm-election and conspiracy-theory segment from 25:45 to 32:35, which is low in information density.