[Nico's Weekly Insights] Crisis of Credibility: Why the Fed, the BoC, and the AI Boom Are Flashing Red

Introduction

This was the week the Bank of Canada (BoC) and the US Federal Reserve (FED) were finally forced to act, cutting interest rates because even their flawed and delayed data could no longer justify the "wait and see" approach they've clung to for the past six months and year, respectively.

At the same time, the AI growth narrative (the only pillar that prevented a technical recession and single-handedly launched the market into a bubble), began to show serious signs of potential fraud, threatening the entire market structure.

"Too Little, Too Late?": The Fed & BoC Finally Pivot

The catalyst for this week’s drama was the prior week's bombshell revelation that about 50% of all the U.S. jobs growth reported over the last year never actually existed. This shocking revision forced the Fed's hand, creating the necessary cover for the Bank of Canada to follow suit with its own rate cut without risking a significant drop in the Canadian dollar. The BoC's decision was also driven by its own dire domestic data, as Canada's August jobs report revealed widespread losses and a climbing unemployment rate.

The Federal Reserve (FED)

The Fed's 25-basis-point (0.25%) cut was framed not as a reaction to data, but as a "risk management" move. This is a significant pivot. For months, the Fed claimed to be "data-dependent," yet it held rates steady based on jobs data that has now been proven false.

The contradictions are staggering:

• A Convenient Narrative Shift: Fed Chair Powell claimed the massive jobs revisions were "almost exactly what they had anticipated," a statement that directly contradicts months of their "strong and resilient labor market" narrative. He also shifted the goalposts for the labor market, stating the new break-even job growth is between 0 and 50,000 jobs per month due to lower immigration—a massive drop from the 150-250k range previously used to justify holding rates high.

• Ignoring Reality: Powell insisted that "generally households are in good shape" despite soaring consumer loan defaults and credit card delinquencies approaching 2009 levels.

• A Fractured Committee: Despite a near-unanimous vote, the Fed's own "dot plot" (a chart showing where each Fed official expects interest rates to be in the future) revealed a complete political polarization. Nine members see two or more cuts by year-end, while seven see no further cuts, exposing a deep internal division.

The reality is that a token 0.25% cut will do little to reverse a slowdown the Fed allowed to worsen while relying on discredited data.

The Bank of Canada (BoC)

The BoC followed a similar playbook, cutting its rate by 25 basis points (0.25%) while citing the Q2 GDP contraction and a weakening labor market (7.1% unemployment).

However, their policy appears contradictory and their narrative flawed.

• The Unspoken Reason: The rate cut was likely driven by the deepening trouble in the Canadian real estate market. With prices in a national downtrend since March 2022—when the "late to the party" BoC began hiking rates—a few small cuts are unlikely to reverse the trend, but they signal a growing panic about the market's stability.

• Flawed Justifications: The Bank claimed inflation has eased due to the removal of retaliatory tariffs, yet Governor Macklem also stated the weak economy is forcing businesses to absorb costs because consumers are tapped out. Both cannot be the primary reason.

• Unrealistic Forecasts: The BoC bizarrely projects 1% growth in Q3 despite clear evidence of a broad economic contraction across eight of nine retail subsectors.

The most likely scenario for Canada is stagflation (a toxic mix of a stagnant economy and high inflation), as massive government fiscal stimulus is expected to reignite inflation while the underlying economy remains stalled.

Major Developing Story: The AI Narrative Springs a Leak

The AI Capital Expenditure (CAPEX) boom—the money companies spend on physical assets like servers and equipment—has been the single most important story propping up the market since the 2022-2023 bear market. In fact, it's the only reason the broad economy has avoided an official recession. This has created a "silent recession" for many, as the immense wealth generated remains highly concentrated in one sector, failing to benefit the average person.

This week, that pillar began to wobble.

An under-the-radar disclosure revealed that Nvidia has a Master Service Agreement (MSA) with key partners like CoreWeave and Lambda, obligating Nvidia to buy back any of their unsold data center capacity.

This is a massive red flag for several reasons:

• Artificial Demand: It strongly suggests Nvidia may be subsidizing its own sales through "revenue round-tripping" (a deceptive practice where a company sells products to a partner and then agrees to buy back services from that same partner, creating the illusion of real sales), just to keep its growth numbers high.

• Delayed Disclosure: The agreement was made over two years ago but was only just disclosed, raising serious questions about transparency and potential securities fraud.

• Insider Actions: This news comes as Nvidia's CEO has been selling a significant amount of his shares since July—not typically the action of a leader supremely confident in future growth.

So what does this mean? If the market's most important growth story is built on a fragile foundation, the risk of the entire AI bubble deflating increases significantly.

On the Ground: The Consumer Is Tapped Out

While Wall Street debates AI, the real economy is sending clear distress signals.

• The Canary in the Credit Market: Tricolor Holdings, a subprime auto lender (a company that lends to borrowers with poor credit history) with nearly $2 billion in debt, collapsed this week. This is a powerful, concrete sign of growing stress in the credit market, as auto delinquencies are trending back toward 2009 levels.

• Proof in the Data: The pain is widespread. The latest data showed that Canadian retail sales experienced a broad-based contraction, falling in eight of nine subsectors.

• The "Why": This is happening because households are stretched thin. Consumer sentiment is hovering near 50-year lows as people worry about job security.

Noteworthy Signals on My Radar

Here are a few other brief but important developments from last week:

• Market Complacency vs. Reality: In a classic disconnect, corporate bond spreads (the extra interest investors demand to hold riskier corporate debt compared to safe government bonds) are at their tightest levels in 20 years, while consumer sentiment remains near historic lows.

• A New Labor Tariff: The Trump administration announced a $100,000 fee on new H-1B visas, a "labor tariff" that follows the previous goods tariffs and will have significant economic consequences.

• Canada's Real Estate Woes: Canada’s housing inventory continues to pile up to near a 20-year high, while mortgage delinquencies are accelerating.

• Technical Strain: Most asset classes are rising together and are trading at more than three standard deviations (a measure of how far an asset's price has moved from its long-term average) above their moving averages, suggesting a "reversion to the mean," or a return to normal levels, is highly likely.

Looking Forward

This week I will be closely monitoring these two:

• Thursday, September 25th: U.S. GDP Q2 (3rd estimate) and Corporate Profits.

• Friday, September 26th: The Fed's preferred inflation gauge, the PCE Price Index.

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