Summary

Of the three major US domestic tail risks, budget cuts and an aggressive immigration crackdown have clearly receded; tariffs are the main variable still playing out. After the “Big Beautiful Bill” passed, the budget-cut risk was largely removed. The Dignity Act gives people who lived in the US before 2020, had previously paid taxes, and can continue working and paying roughly $7,000 a path to remain and work, reducing the risk of a sudden labor-force contraction. The speaker’s market read was blunt: markets have been trading talk, assuming Trump’s extreme statements may ultimately not be implemented.
The worst policy shock from tariffs may be behind us, but price pass-through is not finished and will become more visible in Q3 and Q4. Below-consensus CPI masked rising goods prices; rents are still falling because of an roughly 18-month lag, and wages have not formed a spiral, so the speaker views tariffs primarily as a one-off shock. The data broadly suggest that around 50% of costs are passed through within 3 months, while 80%-90% takes more than 6 months. “The bulk is probably behind us” refers to policy uncertainty, not the inflation impact.
Replacing Jay Powell would not free the Fed from macro constraints; at most it would produce one rate cut, not large-scale easing. The speaker believes Trump’s attacks on Powell partly stem from Powell explicitly tying the decision not to cut and the inflation risk to the president’s tariff policy. After pressuring Powell over cost overruns on the Fed building renovation, the White House backed off. Even if Trump’s preferred candidate takes over next year, “he can come in and cut rates once, but he cannot help Trump drive rates extremely low.”
US equities are making new highs on both earnings and mechanical buying, but elevated valuations and accumulating systematic positioning are setting up the next bout of volatility. TSMC, JPMorgan, Goldman Sachs and others delivered results above expectations. With the VIX around 16, falling volatility prompted CTA and vol-control strategies to buy roughly $67B over the past month and about $30B last week; if conditions hold, they could buy another $42B next week. “One force is earnings, and the second is technical,” with the latter both stabilizing the trend and building risk.
Banks may be the direct beneficiaries of deregulation, with released capital potentially driving business expansion or flowing into dividends and buybacks. US loan demand and corporate lending are recovering. Sales and trading remained strong in May and June after April’s heavy volumes, while private-side demand, including ECM, is also picking up. The speaker expects eSLR leverage limits on low-risk assets to ease, while CCAR and capital-adequacy requirements could decline by roughly 80bp. Capital released all at once but not immediately deployable may first be returned to shareholders, or gradually move into financing and capex.
Rather than making a broad bet on the Mag Seven, the speaker believes the semiconductor shortage supercycle “is just getting started.” GPT handles roughly 1B requests a day. Traditional web traffic grows linearly because of population and device constraints, while AI requests consume large numbers of tokens; usage is rising exponentially, each call requires more tokens, and token prices must continue to fall. Together, those forces are lifting chip demand. “People only get lazier,” while TSMC’s EUV capacity can expand only linearly from 2026 through 2029. Even AMD chips once considered unsuitable for inference or training will be used up in a shortage.
Europe has reduced its tail risk on the back of Germany’s spending certainty, while China shows a widening gap between hotter capital markets and worsening real consumption. Shanghai’s official data show May 2025 consumption up 7.5% year over year, but the speaker said he could not see how that figure was derived from the original numbers of 1516 and 1590; using the latter, he estimates May was down roughly 4.8%. Shenzhen was down 1.3% from January to May, and Beijing was down 2.8%. Subsidies and money printing have still not produced a wage-price spiral. Hong Kong equities have risen without a commensurate increase in financing volume, looking more like an attempt to push the market up first and achieve financing effects later; sustainability remains unproven.

Deep dive

1. US Policy Tail Risks Have Fallen from Cliff-Edge Threats to Measurable Slow Variables

The speaker revisited last December’s risk list: tariffs, budget cuts, immigration, and economies outside the US, including Europe and China. The framework then was “a high floor, but enormous risks”; today, the fundamental floor is slightly lower, but tail risks have contracted sharply.
In his framing, the Dignity Act offers a compromise for people already living in the US before 2020: they cannot obtain US status, but if they can continue working, pay roughly $7,000, and have a prior tax record, they can remain and work. It cannot restore the incremental immigration benefit of the previous 2 years, but it reduces the cliff risk of mass deportations, immigrants becoming afraid to work, a sudden labor-force contraction, and a resulting inflation spike.
After the “Big Beautiful Bill” passed, the budget-cut risk was largely removed. DOGE did not materially change the fiscal direction; deficit/GDP narrowed only slightly, while the debt stock continues to expand. Even the immigration issue most capable of mobilizing voters has landed on a compromise, making markets increasingly confident that Trump will ultimately compromise.
Markets have reacted only modestly to new tariff threats, pressure on allies, and even attacks on the Fed. The speaker’s blunt translation was: “Trump, what you say is no different from farting”（特朗普你说的话跟放屁没有区别）—not that policy has no impact, but that markets have been trading talk and no longer treat rhetorical extremes as the final outcome.

2. Tariffs Will Lift Future CPI but Have Not Created a Persistent Wage-Rent Spiral

The latest CPI came in below expectations, but the details were unattractive: import and goods prices have already risen, and the tariff impact is beginning to show. At the same time, rents continue to fall and wages have not accelerated. The speaker therefore sees the current inflation impulse as primarily a one-off goods shock rather than broad-based reflation.
Rent is a key buffer in his framework: “Rent has an 18-month lag”（房租这个东西是有十八个月的滞后）. A rise more than a year ago does not imply real-time acceleration, and the same lag applies to the current decline. Some goods inflation may cause the Fed to delay cuts, but is unlikely to make it persistently hawkish.
Cost pass-through still has a time lag. Import prices have already moved, but corporate data suggest roughly 50% of costs are passed through within 3 months, while 80%-90% takes more than 6 months. The speaker therefore expects CPI effects to continue appearing in Q3, Q4 and even next year, though probably less severely than during the mid-2019 US-China trade war.
Europe has been threatened with 30% tariffs, copper has been raised to 50%, and pharmaceuticals and semiconductors could still face sector-based tariffs. But higher drug prices would directly hit healthcare costs and the midterms, while semiconductors remain constrained by Taiwan and the EUV supply structure. His base case is still that sector-wide semiconductor tariffs will be introduced, but “the worst period may be over.”

3. Fed Personnel Noise Cannot Override the Fundamentals Driving Rates

The speaker believes Powell angered Trump, who places a high value on power and saving face, by explicitly identifying tariffs as the reason for inflation and for holding off on rate cuts at the Fed meeting. Trump then tried to apply pressure by attacking the cost and budget overruns of the Fed building renovation, because the White House could not fire an independent central-bank chair solely over a policy disagreement.
The White House said several days ago that it had no intention of firing Powell, further reinforcing markets’ low sensitivity to verbal threats. Powell will leave next year regardless. Even a successor more sympathetic to Trump could cut rates at most once, but could not help Trump push them to extremely low levels.

4. Earnings and Low-Volatility Buying Are Pushing US Equities Higher While Building Trend Risk

The new highs are not purely a function of valuation expansion. TSMC and other semiconductor companies beat expectations and issued solid outlooks, while JPMorgan, Goldman Sachs and other financial institutions also delivered strong results. The speaker split the rally into two forces: “One force is earnings, and the second is technical”（一方面是业绩推动，第二方面是技术性的推动）.
The technical impulse comes from falling volatility: the VIX is around 16, one-week implied volatility is roughly 1.28, and weekly volatility in the semiconductor sector is about 5.8%. CTA, vol-control and other systematic strategies bought roughly $67B across global markets over the past month, including about $30B last week.
If low volatility and a steady grind higher continue, systematic strategies could buy another roughly $42B next week. This feedback loop makes the advance smoother, but, as last year, it also builds risk: falling volatility drives more buying while systematic risk continues to accumulate.

5. Bank Deregulation Turns the Loan Recovery into a Capital-Release Trade

Bank earnings are providing an early macro signal: loan demand is rising and corporate lending is recovering. Trading businesses are not benefiting only from April’s heavy volumes; even as volumes eased in May and June, sales and trading remained solid.
Post-2008 limits on leverage, proprietary risk and market-maker positions depressed financial-sector earnings, with even low-risk assets such as US Treasuries constrained. The speaker expects eSLR easing to let banks use more leverage against low-risk assets, potentially improving investment-bank trading businesses.
The other channel is CCAR and capital requirements. Roughly 80bp of capital could potentially be released across the industry, with both risk-based and non-risk-based capital measures benefiting. Because loan and financing demand will grow only gradually, excess capital released all at once could end up as dividends and buybacks.
Financing demand on the US private side is also recovering, including ECM, contrasting with Hong Kong’s still-incomplete financing function. The speaker’s chain of reasoning is that released bank capital could eventually flow back into corporate capex, particularly semiconductor capacity expansion, where funding needs are enormous.

6. AI Access Rewrites Compute Demand from a Linear Function to an Exponential One

The speaker’s order of magnitude is roughly 1B GPT requests per day, not 1B tokens. Traditional web-server traffic has grown only modestly since 2014 because population and devices such as smartphones are approaching saturation: “One person cannot use five phones at the same time to visit five different places.”
After 2023 and 2024, web search began to be replaced by inference requests. A single GPT request also consumes a large number of tokens, so traffic multiplied by compute per request means demand is no longer merely a linear substitution. “Once I can use Google, I will never go back to the library to look through books.”
Semiconductor demand is being driven by 3 forces at once: token usage is rising exponentially, each call requires more tokens, and the price per token must continue falling to broaden adoption. The result is not lower compute spending, but demand for “more advanced chips, better chips, and then more chips.”
In the speaker’s supply framework, TSMC is currently the only company in the market able to manufacture EUV, and its expansion path in 2026, 2027, 2028 and 2029 can only proceed linearly. Demand will “eat up all available capacity.” The AMD example shows that in a shortage, any chip that can be produced will find a use—even chips once considered unusable for Isaac, inference and training.

7. The US Stands Apart on Earnings and AI; China and Europe Are Mostly Valuation Repair

The speaker defines US exceptionalism as corporate earnings, high technology, and the “dream” around AI, cloud compute and future growth. Europe and China lack the same differentiation; their rallies are driven mainly by low-valuation repair and hopes for government spending. Upside tail risks can produce sharp gains, but not necessarily lasting ones.
Europe has performed better than expected because, however weak the current fundamentals may be, the certainty of large-scale German spending is enough to reduce the risk of an economic break. China is the opposite: capital markets are heating up while real-economy consumption data continue to deteriorate.
Shanghai’s official data show total retail sales of consumer goods up 7.5% year over year in May 2025, but the speaker said he could not see how that figure was derived from the original numbers of 1516 and 1590. Using the original values, he estimates May was down roughly 4.8%. Shenzhen was down 1.3% from January to May, Beijing was down 2.8%, and May was worse than January through April. He recommends comparing the original consumption and private-sector fixed-asset investment figures published by local statistics bureaus.
Since September last year, the authorities have increased base money, and this year they have issued consumer subsidies, but still have not achieved “inflation-led inventory liquidation.” The explanation is a deteriorating household balance sheet, excess capacity and too few jobs: higher goods prices cannot trigger a wage spiral. That is “completely different” from inflation driven by wages chasing prices.
Hong Kong equities have been pushed higher by capital, but financing volume has not kept pace with the gains. The market has not yet recreated the self-reinforcing structure in which prices, turnover and refinancing strengthen one another. For now, it looks more like pushing the market up first and hoping financing follows. The speaker will wait for the financing function to genuinely recover before judging how far the rally can run.
A weaker Chinese economy “does not necessarily affect global markets,” because fiercer competition can instead push global prices lower. Domestically, China may continue printing money and lifting capital markets to restore financing. But the final judgment remains bearish: “This is plainly not sustainable; it will not last”（这个肯定不是一个能够sustain、能够持久的事情）.

Zach Dell - Powering the Future - [Invest Like the Best, EP.434]Where Are We In The Cycle? | Willy Woo