MacroVoices: Luke Gromen Says AI Layoffs Could Put 40% of US Bank Equity at Risk for Every 5% Consumer Default Rate, and Sees the Fed as the Only Treasury Buyer in a Downturn
Episode 556 recorded October 27, 2026, published October 29, one week before the US midterm elections
Forest for the Trees founder Luke Gromen used his return to MacroVoices to lay out what he called a "second derivative" credit problem that markets have barely begun to discuss. The argument is that AI-driven white-collar job losses will eventually hit roughly $19 trillion of US consumer debt, mostly mortgages, credit cards and auto loans. In his arithmetic, a 5% default rate on that stock is about $1 trillion, set against $2.6 trillion of total equity capital in the US banking system, according to the Fed. "Every 5% default rate increase on consumer debt as a result of AI unemployment or deflation in wages is equal to 40% of the total equity base of the United States banking system," he said. "You see the problem here? And that's the side that no one's talking about yet, and I think they need to be."
The AI employment argument may be turning, and credit stocks are already signaling it
Gromen said the debate over AI and white-collar employment has shifted decisively in the past two weeks. He cited Kroger discussing cuts to about 37% of its corporate workforce, American Express and Barclays each announcing 5% reductions attributed to AI, and Microsoft's buyout offer to 27% of its workforce. He called the Microsoft news "the 'we're going to need a bigger boat' moment for the employment argument around AI." His view is that displaced workers will not easily find equivalent jobs because AI is hitting finance, tech and broader white-collar work simultaneously.
He argued that market behavior is consistent with this concern. Bank stocks, consumer credit names, Blackstone, Blue Owl, American Express and Capital One have all badly underperformed the S&P 500 over the past three to six months. "If AI works, why would I want to own any of this stuff? Makes no sense," he said. He conceded the thesis is partly a "thought stream" rather than a finished model, and that investors remain focused on the narrower question of whether hyperscalers can keep spending $600 billion to $1 trillion a year. He said he holds about 30% of his liquid net worth in cash and T-bills. He is reluctant to short in what he described as a rigged market operating under fiscal dominance, where the Treasury or the Fed steps in whenever bond markets malfunction.
The MacroVoices market desk picked up the theme. Patrick Ceresna proposed a bearish expression through Capital One, trading around $204.88 and pivoting at its 50-day moving average after peaking in January. He pointed to the January 2027 200/175 put spread at about $5.96, with a maximum payoff of $19.04, roughly 3:1 reward to risk. Implied volatility on the stock sits near the bottom of its one-year range.
A recession would leave the Fed as the buyer of last resort
Gromen walked through the Treasury supply math if an AI bust triggered a recession. The US already runs roughly $2 trillion deficits. Based on the last three downturns, which added 600 to 1,000 basis points of GDP to the deficit, he estimates another $1.8 trillion to $2.4 trillion could be added, taking the total to about $4 trillion. He then layered on banks selling Treasuries to offset credit losses, at an estimated $200 billion to $300 billion a year. Foreign central banks are on pace to sell almost $600 billion of Treasuries since February. Hedge funds, which own about 8% of the market, would de-gross and might sell another $200 billion. That takes effective supply to more than $5 trillion.
"Who's the buyer? Mom and pop, as they're losing their jobs? Pensions, as they're paying out early withdrawals? No, there's only one buyer. It's the Fed," he said. "Fed's going to have to print money and buy Treasuries. And they will say, 'We're not monetizing the debt.' And it'll all be bull crap." He added that this response cannot happen before a crisis, because otherwise it would look like a handout to banks. "You got to scare people first." He said investors should fade any bond rally triggered by an AI slowdown. Any dip in long yields would likely reverse once the Treasury's quarterly refunding announcement revealed higher issuance needs, which he put at closer to $3.5 trillion a year than $2 trillion. He noted that interest, entitlements and Veterans Affairs spending already consume about 105% of federal receipts.
Erik Townsend suggested the policy backdrop is complicated. The administration regards AI leadership as a national security priority and could be pushed to support the sector if credit tightens. Gromen agreed that AI is now viewed as too big to fail in Washington, and said he has heard credible reports that contingency planning began over a year ago. He noted that the administration's ban on DeepSeek in government-linked programs undercuts David Sacks' no-regulation stance, calling it "a moat" for OpenAI and Anthropic.
The Iran war is an attrition contest over air defense missiles and the bond market
Gromen acknowledged his errors on the Strait of Hormuz. His April forecast that the closure could last into early July proved too short, since the strait has now been effectively closed twice as long. But the economic fallout he and Townsend expected has been slower to arrive. He attributed the delay to China constraining demand and drawing down its strategic reserves, along with coordinated releases from Western reserves. He described the strait as "Schrödinger's closure," in that both Iran and the US are treating it as closed while President Trump describes it as open. He also said he is hearing that some emerging-market farmers are skipping fertilizer purchases because of cost. That would show up as lower yields next year rather than as food inflation now, which is paradoxically bearish for crops in the short term and bullish later.
He said he is puzzled by the oil market. SPR releases, reportedly resumed Hormuz flows and damaged refineries should imply ample crude, yet prices remain far above levels of six to eight months ago, and diesel in some regions is nearing $200 a barrel. He suggested China's renewed buying could reconcile the picture but said he could not confirm it.
His core thesis is unchanged: "Iran doesn't have to beat the US, it just has to beat the bond market." The 10-year yield was 3.94% when he first made the argument on February 27 and touched 5.3% a couple of weeks ago. In his illustrative math, the US can replenish perhaps 100 air defense missiles a month while Iran can force the use of 150 to 300, which would eventually leave US forces and bases exposed. He argued the US has not fought a war without air superiority in 80 years and cannot credibly invade under those conditions. Russia and China, in his view, have every incentive to keep supplying Iran, and Israel is content to let the US absorb the burden. He expects the conflict to drag on and to be a major factor in the administration's unpopularity. Ceresna's technical read is consistent: oil keeps recovering to prior highs after each headline, with WTI technically targeting the $120 previous high.
A suspicious Treasury rally last Thursday
Gromen flagged a 20 basis point intraday fall in the 10-year yield last Thursday. He said such moves in his 31-year career have typically coincided with events such as 9/11, Lehman and COVID. The move broke from the prevailing regime, in which gold was down $50, oil up 3%, Bitcoin down 3% to 4% and the dollar modestly higher, all of which should have meant higher yields. The 10-year has since been pinned near 4.99%.
He speculated that someone in markets may have received a heads-up from the administration that it expects to lose the House. He pointed to Trump's repeated warnings that a Democratic win would bring a "1929 style depression" and to Treasury Secretary Scott Bessent's reported threat to compress planned fiscal consolidation into the window from November 4 to January 3, 2027. His analogy was "if I can't win at Monopoly, I'm going to just dump over the board." He also noted that the CFTC was reportedly told to stand down on an inquiry into suspected advance information on Trump's war-related posts that moved oil. He described all this as a suspicion, not an established fact, and said he does not know what to make of it. He said he has no strong view on the FOMC decision, expecting a hold or a 25 basis point hike, and called a hike "the wrong thing."
Political and social risk beyond the midterms
Gromen was blunt about the longer-term political consequences. Even if Bessent and Sacks succeed in preventing an AI bust, he questioned what the US would win. The country has a growing, heterogeneous population that, in his view, "can barely get along," and it would now face significant white-collar job losses. China, Japan and Korea face demographic decline but have more homogeneous societies. He said the issue will be "litigated" starting in 2027, "with Molotov cocktails in city centers around the United States," as in France today. He referenced Peter Turchin's work on elite overproduction and wealth inequality. He said he hopes for more "second and third derivative thinkers" around the administration.
Townsend added that Anthropic's recently filed S-1 contains language that sufficiently advanced AI systems could, without adequate safeguards, pose "catastrophic or existential risks to humanity." He suggested it hands Democrats ammunition against any push to prioritize AI support as a national security matter during the lame-duck session.
Market desk: Mag 7 cracks, hawkish hold, gold at a pivot
Ceresna said this week's earnings gave a mixed signal. Microsoft rose while Alphabet fell sharply, and the market sees a growing split between funding the AI buildout and demonstrating returns. Microsoft's quarterly free cash flow was about $18 billion against minus $9 billion at Alphabet. The Nasdaq is below its 50-day moving average in what he described as a bear flag. The Mag 7, at roughly 35% of the S&P 500, sit at their 50-day average, and the S&P is holding above a systematic-selling zone of 7,600 to 7,700 where CTAs and vol-targeting funds could start to unwind.
On the Fed, he said the market got the hawkish hold it expected. Chair Warsh acknowledged some tightening of financial conditions but did not call policy tight or say the bond market had done enough tightening. The dollar uptrend remains intact, with the euro near 52-week lows and a break of the 111 level likely to extend dollar strength. Gold sits on $4,000 support, with a distributive chart that leaves room for another 5% to 10% drop, though he remains long-term bullish. Copper is bouncing toward 670 after failing to make new highs despite crowded bullish positioning, and a break below 650 could squeeze the trade. He also noted a divergence in uranium, where U3O8 holds above $90 a pound but equities keep falling. A corn production forecast of 234 million bushels triggered roughly 166,000 net contracts of speculative selling over two weeks.