Back Research Notes The Confusing Cycle: Fed Drama, Tariffs, Inflation Fears, and the AI-Driven Expansion Published on August 31, 2025 By Jordi Visser In this week’s video , I walk through how markets continue to climb the wall of worry: the S&P notched a fourth straight monthly gain while small caps and banks led in a reflation-friendly setup. I explain why the multi-month manufacturing slump looks set to turn as AI infrastructure capex accelerates, from data centers to transformers and cooling and now to power and how that should broaden earnings beyond the Mag 7 into the S&P 493, mid-caps, and non-tech. I also connect construction momentum, DRAM pricing, and durable goods to a nascent PMI rebound, and outline the knock-on effects for oil if PMIs push toward 60 at a time it is hated. I then dig into policy and positioning, subdued inflation, a weakening youth labor cohort under AI pressure, and the Fed’s evolving stance with Waller seen as the frontrunner plus why Nvidia’s mixed print doesn’t derail the bigger inference power story but is likely to hurt momentum in AI trades. I cover China’s potential breakout and the odds of a Trump–Xi deal, the step-function from GPT-5 (reasoning at scale, insatiable compute), and why startups are structurally advantaged while incumbents face disruption across sectors. Finally, I touch on Tesla’s video-first robotaxi data strategy, Bitcoin’s pullback amid China rotation, and the rise of stablecoins as the transaction backbone for the digital economy. Timestamps: (00:00–01:15) U.S. equities capped August with strength: S&P up +2.5% for its fourth monthly gain, Russell 2000 up +7% (biggest since the election), and banks (BKX) breaking 2021 highs, signaling reflation momentum implying a PMI recovery is coming. (02:16–04:38) Earnings season delivered broad-based revenue beats, with AI driving profit margins. PMI, historically recessionary at current lows, is expected to rebound as hyperscalers boost AI infrastructure capex (gas turbines, transformers, cooling). Manufacturing recession may finally turn after months below 50. (05:19–07:33) Earnings gains are broadening beyond the “Mag 7.” Rising PMIs should pull revenues and stock participation wider, favoring S&P 493, mid-caps, and non-tech. Durable goods and data center buildouts confirm the manufacturing rebound story. (08:00–10:26) Construction momentum index surged in July (+41% YoY), led by data centers, R&D labs, and warehouses. DRAM spot prices (DDR3) rising in tandem with PMI signal tightening supply chains and cyclical hardware tailwinds. (10:43–12:55) Rising PMIs historically push oil higher. With bearish sentiment and record hedge fund shorts, based on history oil could spike toward $100 if PMI gets near 60 in the coming year. AI-driven power demand is accelerating: Google now processes ~1 quadrillion tokens/month; inference electricity needs could rival a nation’s grid. (14:07–16:55) Nvidia’s data center revenues disappointed despite booming inference demand. Meanwhile, China equity breakout gathers steam: wage hikes to spur consumption, AI chip output tripling, and a potential Trump–Xi trade deal around APEC (rare earths as leverage). (18:13–21:18) Fed drama persists. Headline inflation remains subdued (~2.7%), but AI-driven job disruption is weighing on younger workers (22–30). Waller (dovish, “team transitory”) is frontrunner for next Fed chair. Labor market softness + AI adoption complicates policy. (27:00–32:52) GPT-5 rollout = major leap: IQ ~148, 8x reasoning usage growth, 700M users. This is DeepSeek x 100 due to users now having reasoning on demand. Demand for compute is “insatiable.” Startups structurally advantaged over incumbents, as MIT report shows 95% of corporate pilots fail. All established firms (finance, healthcare, commodities, pharma) face disruption. (34:14–36:45) AI-biotech hybrids (e.g., GPT-4B in cellular reprogramming) open near-term longevity investing themes: reversing aging, chronic disease treatment. Threatens pharma incumbents’ revenue streams while creating new biotech opportunities. (37:11–39:36) Tesla’s robotaxi bet is key to humanoid AI progress, shifting to video-based training. Bitcoin pulled back after four straight up months as Chinese family offices rotated into equities. Stablecoins emerging as backbone of digital economy adoption could scale to trillions. Watch here