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- The AI Lag Is The New QE For Now . . . . . Yield Curve Control Already Underway
The AI Lag Is The New QE For Now . . . . . Yield Curve Control Already Underway
Can you make more than -0.50% in 12 months . . . . . the AI chase is the chase . . . . . Bessent put bonds to sleep
David Young
October 20, 2025
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This Is Not Investment Advice
Money Printer Not Yet Running . . . . . . So Why Are Stocks So Strongly Supported . . . . . Three Reasons Why
It’s quite obvious that something, or rather multiple things, are providing a massive wind in the sails effect for Risk On and equities specifically. Many tend to jump to some sort of conclusion along the lines of “well the central banks are printing all this money” as if this was all happening unilaterally right here and right now across the globe. In my view that stance is currently factually inaccurate and also not coherently accounting for market action recently, emphasis on the action since April of 2025.
In my view, and extra emphasis this is simply how I am viewing this scenario with an open mind, we have three main things going on (among other factors) within the ‘Melt Up’ providing a near constant stimulus for stocks. FYI - it won’t last forever.
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A recently published post here linked below might provide more helpful context for this post:
Here are the three factors under discussion for this post:
YCC
Current Fed posture
The AI Lag effect
Quick recap on the ‘Melt Up’:
Very rare occurrence of nearly all major economies and governments generally rowing the boat in the same direction in terms of the need for each to grow themselves and protect themselves - massive fiscal spending forthcoming
Generally speaking Central Banks in an easing mode with some even expanding the Balance Sheet
A literal and direct conflict arms race over AI, Bitcoin, and hard assets like rare earths, uranium, and silver . . . . . . and the associated impacts on power, energy, electricity, and infrastructure spending and deployment
Yield Curve Control
In my view Treasury Secretary Bessent already launched Yield Curve Control . . . . . a view which is in no way currently consensus. Let’s look at MOVE Weekly:
As depicted above, it is tough to dispute the fact that whatever Bessent did it has most certainly put UST to sleep.
Now - let’s also consider the fact that CDS prices have plunged aggressively . . . . . . meaning the cost to insure against a U.S. default has fallen precipitously. Add in the fact that U.S. longer duration rates have simply been much better behaved than those in Japan, UK, and France.
In my opinion - we are already into the Yield Curve Control regime. Bessent told you the supply of new bonds was holding firm and that the Treasury would rather than selling more be buying more themselves.
Current Fed Posture . . . . . Eye In The Sky 1YR Real Yield
After the last meeting I was trying to emphasize how in my view Powell emphasizing NOT being in an easing mode made the environment even more bullish. To me - given the precise scenario in which we find ourselves, it is more bullish to not give everything away now and instead keep as much ammunition stacked as possible for future deployment. This is what Powell has done to this point.
Powell went out of his way to clarify that the Fed is currently restrictive and trying to move from restrictive to neutral. In my view this is completely different from “the Fed is easing and QE is coming soon” and more bullish. If Powell gives everything away right away . . . . . . . . . . then the surprise impact effect is gone. Goodbye. By only moving right now from restrictive to neutral, it keeps the market’s perception on alert for how “this is a start and more could be coming”.
Consequently - we have seen prominent figures opine about the “correct neutral rate for Fed Funds Rate” with many tossing around this figure close to 250 basis points. Okie dokie. If the market is moving towards and demanding a FFR at 250 BPS within the next year, then that means that “real rates on the 1YR are negative” with the Eye in the Sky dangling that carrot constantly in front of equities and Risk On. Core PCE is 2.9% or 3%ish and the Fed is fading the “inflation target” so the Real Rate on the 1YR is arguably negative or damn close to zero so long as PCE is 2-3%ish. Powell is telling you to take on more risk so long as you feel confident in exceeding a negative 50 basis points return over the next 12 months. Money is cheap. This is very, very bullish.
AI Lag Effect
Imagine if the Secretary of War, Secretary of Transportation, and the Secretary of the Interior released a joint statement and presser that pitched the following:
America will build 50 new international airports stateside in the next 6 months and ten of them will also be able to handle our largest military aircraft.
At first the collection of contractors, vendors, suppliers, and other entities might jump for joy at all this business up for grabs before realizing there is no chance in hell 50 new major airports will be built in the next 6 months in any country especially not America. It simply can’t happen that quickly not to mention all the legal, real estate, and environmental obstacles that would pop up instantly.
However - most contractors, vendors, and suppliers would listen and pay attention and try and get the business and the money even if it ended up taking 25 years to just add two new airports rather than 50 in 6 months.
I’m seeing AI have a similar effect. A hyper-scaler can say “by 2028 we will control over 100 quintillion mega-supersonic-giga-supreme-terra Watts and we will be generating all the AI stuff for everyone on planet Earth” . . . . . . statements that appear more absurd as time goes on. However - does it matter?
It’s too early to say AI is a complete failure and debacle. Not enough time has passed. Sure - users aren’t thrilled with ChatGPT necessarily and there are all sorts of questions. But - does that mean China and America are going to stop pursuing “AI supremacy” anytime soon? Are OpenAi and Grok folding up and closing down now?
The point is that it might take a couple more years to realize that AI is either A) awesome and amazing for society, or B) in major need of a reboot. How much distance can the Nasdaq cover in two years? Get it?
Market still has lots of time to chase the dream before realizing it is a bust or in need of a major pivot. Either way one could see how Risk On would be leaning forward the entire time.
Summary:
In my opinion we already have Yield Curve Control underway
Real yields on the 1YR and Eye in the Sky provide very fertile ground for Risk On assets
Risk On still has lots of time to potentially chase the AI dream before realizing it is a bust or in need of a major pivot
All of these factors create an environment where the market is constantly injecting hopium into the atmosphere.
In my view Risk On will suffer corrections and consolidations but the overall tempo and market construct and environment is encouraging risk taking.
