Episode summary
We Asked Andy Constan What Happens If AI Funding Breaks Before the Thesis — And if Warsh Blinks
Excess Returns
· · 1 hr · Guests: Andy Constan
Summary
Andy Constan argued that record stock prices, high long-term yields, and sticky inflation can coexist because the market is still being driven by strong growth expectations, heavy Treasury and corporate bond supply, and risk-premium changes rather than an imminent collapse in demand. He said higher real growth pushes yields up, while equities can still work when rates are high but not seriously restrictive.
He was skeptical that the U.S. is near a government debt crisis. The bigger issue, in his view, is whether private projects—especially AI capex—can earn more than their cost of capital. He said inflation will not return to target unless policymakers truly reduce the wealth effect by allowing asset prices to fall, but he thinks recent policy has continued to suppress long-term rates and support financial conditions.
Constan also said Kevin Warsh may be signaling a shift by talking about shrinking the Fed balance sheet and letting the bond market do the work. Still, he treated that as a slow-moving “drum beat,” not an imminent policy break. On AI, he argued the near-term risk is funding: the market may eventually struggle to absorb the huge issuance needed to finance data centers before anyone can judge the eventual ROI.
Key takeaways
- Constan said stronger real growth and heavy issuance can explain higher long-term yields without implying a bond-market crisis.
- He argued inflation stays above target unless policymakers reduce the wealth effect by letting stocks, bonds and other assets fall.
- He said the Treasury’s quarterly refunding and bill-vs-coupon mix matter because more coupon supply would be bearish for assets.
- He sees Kevin Warsh’s balance-sheet comments as a possible shift toward less suppression of long-term rates, but not a confirmed break yet.
- He thinks the immediate AI risk is financing capacity, not eventual AI ROI, because the market may not absorb all the needed issuance.
Notable quotes
“Real growth is by its very nature pushes interest rates up because people prefer to build a d spend their cash to build a data center that has great potential for earnings than buy bonds”
“to kill demand, so we should I should have started with this. To get inflation, demand-driven monetary inflation to get back to target, you need to kill demand”
“The only way you do it is by hitting asset prices”
“what I've heard, which I call a drum beat, and I've yet to confirm it, is Worsh has said multiple things that are interesting to me”
“if I think I think I actually have a degenerate short in that from like 145, where is it now? It's probably up a lot”
How the episode opens
Andy, it's good to see you again. — It's great to see you guys. Hey, Justin.
These episodes with you that we do on a monthly basis, I think, have been resonating a lot with our listeners and our subscribers on YouTube. And I think what investors sort of appreciate when we're able to sit down and talk with you is you can kind of take these complexities that you're seeing in the market that we're seeing in the economy and all over the world and a lot of different things and really trying to think about those from a first principles perspective. And you have a good way of kind of getting underneath the surface at the key things that are driving markets and the economy and stocks and everything that you're sort of always looking at for your subscribers.
on a on a on an ongoing daily basis. And I think today we kind of wanted to focus the conversation on a few I guess key ideas. The first is and this is where we'll start.
We'll kind of start with you know where the markets at today given where stocks are, where interest rates are, and just and inflation and kind of think through like what investors should be thinking about as we're sort of in this market regime and period of the market. and then we'll kind of get into things like the risk premium suppression that you've been writing about how Wars and the Fed could kind of uh change things up here. So, sort of a lot to talk about.
Some of this comes from the thoughts you're putting out there on Twitter. Some of it comes from, you know, the damp spring um uh research you're putting out there. So, always just appreciate you kind of sitting down with us and working through some of these things.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai capex financing
- fed balance sheet policy
- treasury issuance
- long-term yields and inflation
- capital markets issuance risk
Companies and tickers mentioned
- NVDA
- Nvidia
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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