The Wooden Nickel is a collection of roughly a handful of recent topics that have caught our attention. Here you’ll find current, open-ended thoughts. We wish to use this piece as a way to think out loud in public rather than make formal proclamations or projections.
1. An Economic Smog
In early December 1952, a high-pressure weather system descended upon London, trapping a layer of cold air near the surface beneath a layer of warm air. With no wind, the air became stagnant. To stay warm, Londoners burned coal, as they had always done. However, this is post-World War II London. To pay off war debts, the country was exporting its high-quality “hard” coal to pay back creditors and instead burned cheap coal that had a much higher sulfur content. The result was millions of homes and several power stations sending enormous amounts of sulfur dioxide and soot into the air. The air became so thick that pedestrians literally could not see their own feet. It was initially greeted as just another weather event in a city infamous for its fog; references to the city’s fog are found in the works of Dickens or Sir Arthur Conan Doyle. The city went about business as usual once the weather cleared five days later. Only when London ran out of coffers, and the city’s florists ran out of flowers for funeral wreaths, did people grasp what had occurred. The death toll reached into the thousands.
In the fog of economic datapoints and headlines over the last few months, we would say most are looking through and expecting an economy that is largely similar to the one of the past year, where strength is concentrated rather than broadly disbursed, technology advancements and investments dominate activity and headlines, while the labor market hopes to bottom. We look for the average result to take root simply because it is what we know. In today’s market, many are squinting through the “fog” of recent policy shifts and anchoring on the expectation of a slowing, average economy. Too often, we fail to think in the “standard deviations beyond.” One such “standard deviation beyond” is indeed to the downside, and was explored in a recent edition of The Wooden Nickel. Now, time for the possibility that the surprise comes to us in the opposite direction: economic acceleration with gains and growth evident across wider swathes of the economy and financial markets. Recent data suggests this is the case.
The US economy entered 2026 with a powerful tailwind. Real GDP grew at an annual rate of 4.3% in Q3 2025, an acceleration from the 3.8% recorded in the second quarter. This momentum is underpinned by a consumer that remains remarkably resilient. Despite concerns that wallets would tighten, retail sales figures have been strong and consumer spending has done more than enough to keep the economic engine humming.
This consumption isn’t happening in a vacuum; it’s supported by a stabilizing labor market and income growth. Real average hourly earnings increased 1.1% year-over-year as of December 2025, and personal income rose 0.4% in the most recent monthly release.
But the most encouraging signs come from the labor market. With the unemployment rate ticking down to 4.4% in December, after the federal government reopened, the labor market appears to be finding its footing. Crucially, the ISM Services Employment sub-index jumped into expansionary territory at 52.0, marking its fifth consecutive monthly increase since bottoming at 46.4 in July.
A recovery and strengthening labor market is at the core of the ISM Services Index, hitting 54.4 in December, its highest reading of the year. A stable labor market in the context of rising corporate investment (whether from expected productivity gains or favorable tax treatment of capital investments) and fiscal support takes a lot of bad scenarios off the table; an improving labor market unlocks a lot of meaningful upside surprises in the future. Especially as it’s been both broad-based and coupled with income growth, a marked improvement from earlier in 2025 (Figure 2).
Figure 2: 90% of Industries are Seeing Positive Real Income Growth, Source: Prometheus Research
While the average observer may not see an accelerating economy through the fog, the stock market is. Since late October, we have witnessed a definitive shift in leadership. For much of 2025, the “Magnificent Seven” were the only game in town, but the tape has changed. Since October 31, an equal-weighted version of the S&P 500 (white line below)) has handily outperformed its market-cap-weighted sibling (orange-dotted line), rising 5.7% compared to 2.1% for the traditional index. This is the market’s way of signaling that the “average” company is finally joining the party. Underneath the surface, we see more evidence of a broadening. Since Halloween, Tech stocks are down 4% (yellow line), while boring materials stocks are up 14.5% (red line), and Financials were up nearly 6% (green line) before today.
Further, the Dow Jones Transportation Average, a classic bellwether for economic health, recently notched its first record high in over a year. Its trailing three-month return has outpaced the Dow Industrials by 6.3 points. In the language of Charles Dow, the “delivery” of goods is finally confirming the “production” of goods—a classic signal of a robust expansion. And in the language of Stanley Druckenmiller, the best economist is the internal guts of the stock market, and it’s telling us that economic growth should be above average in the future.
2. Capital Constraints: How Crazy Could the AI Buildout Get?
Last September, Oracle brought forward the (final?) ingredient to take the AI buildout into bubble territory: leverage. We documented how Oracle was throwing down the gauntlet and nuking its financials; free cash flow would be negative for the next 3 years at least, adding to an already negative 2025. And we speculated that there was no way that others would not follow, including some notable quotes from Silicon Valley’s CEOs and founding leaders.
But what if the AI bubble gets levered without leverage? How crazy could things get?
About a week after that Wooden Nickel, Meta released plans for an innovative financial structure in order to build a 2.1GW data center in Louisiana (enough to power over 1.5 million homes), financed via the largest bond offering ever. Except it wasn’t their debt. Meta and noted private credit manager Blue Owl set up a Special Purpose Vehicle, with the tech giant owning 20% of the entity and contributing land and some construction assets in progress. Blue Owl would finance its capital by tapping the debt markets thanks to PIMCO.
The terms of the deal are such that the SPV would construct the data center with Meta’s physical assets and design knowledge, combined with the wallets of Blue Owl and its investors. Meta would pay rent and be the only tenant on the $27B asset. Not only that, but it provided the SPV with a residual value guarantee on the data center. If anything happened to jeopardize, let alone impair, the value of the data center, Meta would guarantee some amount of payment to Blue Owl for the first 16 years of leasing the data center. So in all, Meta would be paying some $2.5B per year in rent upon completion (plus the higher interest costs/spread of about 1% the SPV bears relative to Meta’s corporate borrowing record), all for the privilege of not having to consolidate the debt on its own balance sheet. Instead of paying $27B to build a data center, it only has to pay ~$2.5B per year and still gets exclusive access to the largest data center in the world. That’s a different type of leverage than most investors are accustomed to.
While some, if not many, investors would manually do the work to incorporate the present value of future lease payments and stress over the nuances of contingent liabilities when assessing a risk/return profile for Meta, you can be assured most people will not.
More important is to remember that innovators are followed by imitators. If Meta can save about $24B in cash expense on a data center deal, it can make those dollars go farther by greatly increasing its expansion plans without stressing balance sheet metrics (to a degree). And unlike Oracle, it’s projected to have far more Free Cash Flow to work with going forward.
Figure 3: Meta Free Cash Flow Forecasts
It’s not hard to see how truly wild and crazy this bubble could get; when you’re paying ~2.5B in rent versus $27B in cap ex and have anywhere from $15B to $50B in free cash flow coming up, that buys a lot of data center capacity. And that’s just one firm. Multiply that across Microsoft, Google, Amazon, with a bit sprinkled in from xAI, and the numbers get staggering. We’re talking pulling forward Trillions in spending and computing via extending commitments out multiple decades.
How likely is this to happen? Probably pretty unlikely; for obvious reasons, we do not have an endless supply of construction workers, electricians, grid capacity, etc. But there will be incremental moves made in this direction, I would venture to guess, over the course of the next couple of years, barring other economic forces. People will imitate this at some level because it makes too much sense not to. But in addition to being constrained via physical inputs, we’re also constrained in the capital markets.
The private credit space, even though it’s exploded in recent years, is still far too small and grows too slowly to accommodate Big Tech’s big spenders. Estimates vary, but at ~$2T (not all of which is accessible or attracted to these types of investments), the market only grows at a few hundred billion per year. It would take just less than a handful of deals like this one to seriously concentrate a new, opaque, and convoluted market going through some of its own organic problems. Just a few data center deals and they would easily eat up 10%-20% of annual fresh capital.
That’s serious concentration risk. And it’s probably a rugged enough governor and limiter of how crazy things could get in 2026 and beyond.
3. Recommended Reads and Listens
