As we discussed last month, the AI buildout is about competition for capital, at such a scale that it’s competing with the U.S. Treasury for money.

And this week, money is running from AI debt and into government debt (Treasuries).

That’s why hotter inflation numbers and hotter economic data over the past two days have resulted in lower, not higher, Treasury yields.

Is it a signal that the technology revolution is slowing? That the payback on the AI buildout might be more at risk? 

As we’ve discussed, the message from the White House AI meeting two weeks ago was no slowdown!

What’s happened since?

There has been a rapid catch up to the top performing models. Anthropic was on top. OpenAI gained a little advantage. Now Meta and Google have both leaped higher, to the point that all four of these frontier model companies have converged on near the same capabilities. 

Did the pacing of new model releases, based on the White House agreement of a few weeks ago, create the opportunity for others to catch up?  Maybe.

Google held back its newest model, sending it to cyber defenders and government testers before it went public. Now it’s been released. And on Sunday, Palantir’s chief technology officer said, “We have frontier models now that have not been released… That would have been an unimaginable thought a year ago.”

Again, if the frontier edge is held back, everyone else catches up. Small models today are more powerful than the biggest models of a year or two ago. Nvidia’s Jensen Huang says 80% of startups now build on open models.

That’s what they call diffusion. The most advanced AI is staying within the labs and the government for testing, but everything just behind it is moving into the economy.

And this is a key moment, as businesses and consumers begin to realize the productivity gains of AI, beyond generating voluminous text and goofy images. Google and Meta are putting powerful autonomous AI tools into the hands of billions of their users.

As with every technology revolution, prices will come down, and usage will go up. Right now, the market is trying to figure out which AI builders will make up for falling prices with more usage, and which ones won’t.

Meanwhile the benefits for the broad economy have yet to be priced.   

With that, let’s revisit the latter half of my July 15 note, just following bank earnings from the second quarter: 

“There has been a widely accepted story about how AI plays out. The machines do the work. Margins explode for a handful of winners. The rest of us end up idle and poor.

History tells us a different story.

The gains from major technological innovations never stay locked up in corporate margins. Competition drives down costs, and pushes the most value to the users.

Think about electricity. It didn’t make the electric companies rich forever. It made everything else possible. The tractor didn’t end work. It moved work off the farm and into everything we built next.

The spreadsheet was supposed to end the accountant. Instead we got more accountants, more analysts, more finance than ever. When a tool makes the work cheaper, we don’t do less of the work. We do far more of it.  

That’s where AI accrues. Not in permanent margin explosion. It’s in new products. New categories. Cheaper goods and services.

Health care that watches over you between doctor visits. Software built for a single customer. Education tuned to one kid. Quality of life goes UP.

Intelligence is becoming cheap and abundant. And when something as powerful as intelligence becomes cheap, we consume much more of it (insatiable). That doesn’t make us idle. It makes us busier than we’ve ever been, doing things we couldn’t do before.

If we look back at the printing press. It enabled the broad distribution of ideas. We got the Enlightenment. And the Enlightenment turned into machines, and we got the Industrial Revolution. The age of building.

The internet was our printing press. It gave everyone access to everything known. That was the modern enlightenment. AI is what comes next. It turns all of that knowledge into the capacity to build.

We may be standing at the front of a new building age.  The American economy went through decades of over-consuming and under-making. The pendulum is about to swing.“

P.S. Pro Perspectives is the daily note — the macro, policy and market structure work that ties everything together. To see how that work gets applied, we manage two model portfolios with documented, multi-year track records: Billionaire’s Portfolio and AI-Innovation Portfolio. Different strategies. Complementary research. Explore the platforms below…

We had the September inflation report this morning. Headline CPI  jumped to 3.7%.

Let’s take a look under the hood.

As you can see in the chart above, this is the same rate-of-change in prices we had in September 2023 (+3.7%).

But it’s a very different inflation.

In 2023, rents were a heavy economic burden. Shelter alone added 2.4 points to the inflation rate. Car insurance added another half point. Both of these CPI components were lagging features of an asset price boom.

Those were sticky price pressures. The kind the Fed can lean against.

Today, the biggest driver is energy. It added 1.4 points to the 3.7%. Gasoline alone added more than a full point.

Meanwhile, the old drivers are fading. Shelter has cooled to 1.1 points. Car insurance prices are down 5% from a year ago. And core inflation, which strips out food and energy, is 2.6%.

So this isn’t an overheating economy.

It’s a war. It’s an energy shock that started on February 28.

The Fed can’t pump oil. And raising rates into an energy shock doesn’t bring gasoline prices down. It squeezes everything else.

The bond market seems to understand that. The 10-year yield went down today, not up.

That said, there is a real risk with persistently high gas prices, and the Fed’s Beige Book spelled it out today. Higher fuel costs are being passed “throughout the supply chain.” Contracts and hedges that kept costs stable are expiring. And workers are asking for cost-of-living raises.

Wages are what gets the Fed’s attention. That said, higher wages driven by higher productivity can be non-inflationary. The Fed should do nothing to disrupt that. But higher wages driven by the perception of embedded higher costs in the economy, that’s where Fed policy comes in. 

Under a Warsh-led Fed, let’s hope the former gets more attention than it would under the old Fed regime. 

The big U.S. banks reported today.

The boom loop we’ve been talking about since March is in these numbers, and in what the CEOs said about AI.

First, the numbers.

Loans are growing at double-digit rates: JPMorgan up 10% from a year ago, Wells Fargo up 11%, Citi up 12%. Deal-making is booming. Goldman’s investment banking fees were up 21%.

What did they say about AI?

Goldman’s David Solomon put a number on it: “Recent studies estimate that the U.S. data center build-out could require north of $10 trillion of investment through 2032, averaging roughly 3.6% of U.S. GDP annually.” And he said, “demand for compute significantly exceeds supply at the moment.”

Citi’s Jane Fraser said higher rates won’t stop it: “I don’t think that higher rates is going to trump the imperative to invest there. We’re not seeing a slowdown in investment in the broader AI ecosystem… There’s simply not enough compute. Energy remains a bottleneck.”

Wells Fargo’s Charlie Scharf said “investment in AI infrastructure, high employment levels and consistent wage growth continue to outweigh the risks” of higher rates, higher oil and persistent inflation.

What are the risks to the boom loop? 

Asked whether financing will become the choke point for AI spending, Solomon said, “I don’t know and nobody knows,” and that there is “pressure on crowding out.” He added, “There will be a point in time when this recalibrates, resets, for sure.”

JPMorgan’s CFO said the AI theme is now “kind of everywhere,” in construction loans, working capital lines and the stock market, and that he “would be surprised if anyone, frankly, was immune” to a major change in sentiment.

Jamie Dimon said JPMorgan is “tightening up a little bit on credit.”

So the loop is real. It started with the hyperscalers funding the buildout from their enormous free cash flow. Now debt is playing a growing role. And with that, the biggest risk to the boom loop is the rising cost of money.

The more money AI companies need, the more they compete with other borrowers, including the U.S. Treasury. That competition can push borrowing costs higher, which can eventually threaten returns on the AI buildout — and ultimately break the boom loop.

That said, on rates, Solomon put it simply: “a 5% 10-year treasury doesn’t scare me.“

Yesterday, the European bond market got a reprieve.

It lasted one day.

Today, Italy’s 10-year yield jumped back UP. French yields UP. The respective spreads against the benchmark German bond yield widened. And the euro fell back toward Monday’s 17-month low.

And European bank stocks took a hit. Société Générale fell 5%, Deutsche Bank about 5%, UniCredit and Intesa 4%. As we discussed last week, European banks are among the biggest owners of their own governments’ bonds. When those bonds fall, the banks fall with them.

This is the effect of the energy shock we’ve discussed along the path of the past seven months. It exposes the anti-growth climate and social agenda that the Brussels bureaucrats have imposed on the European people. 

The bond market is beginning to apply pressure on the European economy, which will apply pressure on European politicians.

This is the “political alignment” by consequence, we’ve talked about.

Let the political class face the consequences of the costs their voters are no longer willing to pay. The goal: bring Europe back into alignment with the United States, away from Chinese influence, and away from its “third pole” posturing. 

On a related note, today in Athens, the U.S. Secretary of State stood in front of the Acropolis and delivered a message to Europe.

And the choice of Athens was the message.

Rubio went to the birthplace of democracy and Western philosophy to remind Europe where it came from, and how far it has strayed.

He said the West “came to feel ashamed of the very things that made us exceptional.” That “nationalism became a dirty word.” That “we opened our borders and outsourced our industry, and allowed our militaries to wither and to decay.”

He said the West “seemed to outsource more of our sovereignty, transferring our decisions to global bureaucracies far beyond the reach of our control.”

Then he drew the line. “Under President Trump, the United States has made its choice.” Europe, he said, can still “awaken from its long slumber and rekindle the fire that was lit here millennia ago.”

America has chosen. Europe hasn’t, yet.

And now, the bond market is adding pressure to that decision.

P.S. Pro Perspectives is the daily note — the macro, policy and market structure work that ties everything together. To see how that work gets applied, we manage two model portfolios with documented, multi-year track records: Billionaire’s Portfolio and AI-Innovation Portfolio. Different strategies. Complementary research. Explore the platforms below…

As we discussed on Thursday, the energy market is doing the tightening in Europe. The bond market (interest rates) will do the strangling.

Today, the head of France’s central bank used the same word. Emmanuel Moulin warned that France is at risk of being “strangled by rising interest rates.“

Keep in mind, this isn’t Italy. It’s France, the euro zone’s second-largest economy. And its own central banker is sounding the alarm in public.

As we discussed last week, a bond market selloff in Italy is one thing (the economic periphery of Europe).  When France, the core, starts to go, the market is now testing the system. France’s 10-year yield closed at 4.87%, and the gap over Germany at 137 basis point, the widest since 2011-2012 (after a bigger blowout this past Friday).

That 2011-2012 date may sound familiar, because that’s when Europe was last teetering on the edge of sovereign defaults, and a full blown debt and currency crisis.

It was rescued by intervention (a threat to backstop sovereign bonds) from the European Central Bank, which only worked because the rest of the world was behind it (namely the Fed).

That Fed support, under Warsh, is now questionable.   

Against that backdrop, the euro fell to a new 17-month low today.

So, the pressure on Europe has quickly become exposed, and is coming from every direction. You could see it all on one front page of the Financial Times today.

Energy: The head of Saudi Aramco warned that the world’s oil stockpiles are “scarily thin.” This is the same week Washington told France and Germany to release their emergency diesel stocks.

Europe is paying the energy bill.

Security: Germany says Russia’s “shadow war” with Europe has entered a new phase. That’s the defense burden for Europe mounting. 

Politics: Spain’s prime minister called a snap election for November 29. That’s economic pressure turning into political consequences. 

And the ECB?

It has raised rates twice since June. Today, Lorenzo Bini Smaghi, a former ECB board member, wrote in the FT that the bond turbulence means it’s time for the ECB to stop shrinking its balance sheet.

As we discussed Thursday, the ECB’s only weapon in a bond selloff is the threat of a backstop. Now a former ECB insider is calling on the bank to stop tightening. If it doesn’t, the bond market may (likely will) test whether the ECB can make good on its threat.

So, why does it matter?

In the near term, it’s shock risk. When the stress moves from Italy to France, with the euro breaking down and bank stocks under pressure, the risk is an accident. And financial accidents in Europe don’t stay in Europe.

In the longer term, it’s a recipe for alignment.

As we’ve discussed throughout the past year, this is political alignment by consequence.

The Trump administration responded to resistance from European leaders by withdrawing the backstops, letting the bills come due, and letting the political class face the costs that their voters are no longer willing to sit around idly and accept.

Political regime change isn’t a risk to Europe’s realignment. It’s probably the only way alignment happens. 

And getting Europe aligned gets us closer to solving the China problem. As we discussed all the way back in my February 2025 note, “Dealing with China is priority number one,” and it “will likely require global participation.”

China has waged a multi-decade economic war on the world. Winning it requires Europe on the same side of the table as the United States, not as the next debtor consumer market for Beijing.

The energy squeeze is the shock to get Europe back into alignment.

Yesterday, we compared rising interest rates on both sides of the Atlantic. In the U.S., the Treasury is competing for money with builders who expect big returns. In Europe, lenders are demanding more return to lend to governments like Italy’s, because the risk is rising.

This is the boom loop versus doom loop we’ve been talking about since March.

In America, compute generates revenue, revenue funds more compute, and compute generates more revenue. In Europe higher energy costs squeeze the budgets of the more fiscally fragile countries, which pushes up their borrowing costs, which threatens solvency, which pressures bank balance sheets, which tightens credit, which weakens the economy.

Today, the market repriced the doom loop.

Italy’s and France’s 10-year yields went up. Germany’s went down. That’s money leaving the fiscally fragile countries, and moving to Germany (relative safety).

If we look at the gap between Italian and German government bond yields, it hit 116 basis points today, the widest of the year. It was 63 the day before the Iran war began.

This chart above signals rising probability that sovereign debt inside of Europe could become a problem again (a revisit of 2011-2012 sovereign debt crisis). The ingredients are in place for it.  

With this spread rising, the euro broke below 1.13 to the lowest level in 17 months.

And European bank stocks fell 3.9%, their worst day since March 3, the first week of the war. 

Why the banks?

European banks are among the biggest owners of their own governments’ bonds. When those bonds fall, the banks fall with them. That’s the link in the loop where sovereign stress becomes banking stress.

What’s driving it? Energy price inflation. 

With that, the U.S. is telling Europe to release their emergency diesel reserves rather than rely on U.S. exports. Trump’s threat is a ban on U.S. diesel exports, which would relieve price pressure at home. China piled on today by halting fuel exports for October.

This all comes as the report on September inflation for the euro zone is due tomorrow morning. It’s expected to come in hot at 3.6% — because of energy prices. 

That puts the ECB in a bind. The energy market is doing the tightening. The bond market will do the strangling. And the ECB, to this point, has been tightening that grip, with two rate hikes since June.

Order in Europe hinges on the ECB’s ability to convince markets it can keep the sovereign debt market stable. But even the U.S. is perceived to be at risk of losing control of its bond market, and it has the firepower of the world’s reserve currency.

The ECB, on the other hand, just has the untested threat that it is the backstop, via its “anti-fragmentation tools. We will likely find out soon whether it can back it up.

Inflation came in cooler today. Growth came in hotter.

And the 10-year Treasury yield went higher, not lower. It hit 5.30%, a high going back to 2002.

It’s a growth story, not an inflation story.

The Fed’s favored inflation gauge (PCE) came in at 3.4% for August. Excluding food and energy, 3.0%, down from 3.3%. And the government’s annual revisions took July down too, from 3.7% to 3.4%.

Meanwhile, the economy grew faster in the second quarter than first reported: 2.2%, revised up from 1.5%. 

So, lower inflation, stronger growth, higher yields.

As we discussed on Monday, this rise in yields is about competition for capital. AI builders are competing with the Treasury for money. Rates are rising because capital is in demand, not because inflation is running away.

And the builders are paying up for capital because they expect high returns.

After the close, Micron gave us more evidence of that reality. They reported revenue up 379% from a year ago, and guided next quarter well above Wall Street’s estimates. The CEO said they “do not have line of sight to when supply and demand will return to balance.”

Their customers have now put up $32 billion in commitments, mostly cash deposits, to lock in memory supply through 2030 and into 2031. They are paying cash today for memory they won’t receive for years.

And Micron is raising its spending to build new factories.

Add to that, the President announced today $200 billion of South Korean investment in American energy: eight new nuclear reactors and a 6.5 gigawatt natural gas power complex in Texas to supply AI data centers.

As we discussed yesterday, power, memory and equipment set the speed limit on this build-out. The above is addressing the limiters.

Now compare this all to Europe.

Germany’s inflation jumped to 3.3% from 2.9%. France came in at 3.4%, Spain at 5%. Inflation is rising and growth isn’t.

Today, Italy’s borrowing cost moved to 104 basis points over Germany’s, the widest of the year. And the cost of insuring against an Italian default hit a new high for the year, more than double where it was when the war started.

Rates are rising on both sides of the Atlantic, but for opposite reasons.

In the U.S., the Treasury is competing for money with builders who expect big returns. In Europe, lenders are demanding more return to lend to governments like Italy’s, because the risk is rising.

It was just two weeks ago that the AI doom campaign bubbled up.

OpenAI had just released its GPT-6 model. 

Three days later, Jensen Huang said AGI had arrived.

Hedge fund legend Paul Tudor Jones then penned an op-ed in the Wall Street Journal sounding the alarm on AI safety. And two leading frontier model CEOs followed it by publicly calling for a slow down on AI model development.

The media and politicians amplified the case.

As we discussed at the time, you can’t slow down in this race, because whoever gets to human-level intelligence first sets the standard, attracts the talent, decides what gets embedded in governments, in banks, in power grids, in weapons. It’s the difference between AI that serves humanity and AI that serves the Chinese Communist Party.

The President said as much today.

Let’s talk about the meeting he convened in the White House this afternoon. 

Fair to say this was short notice, and yet more than thirty leaders were there, from every major company in the AI stack, representing roughly $26 trillion in public market value, nearly $30 trillion adding in private market valuations (OpenAI and Anthropic).

So, this is a room full of the people controlling companies with a combined value nearly the size of the entire U.S. annual economic output. It’s the companies building the technology, buying the infrastructure, financing it, and bringing it to customers — all sitting at the same table.

The result: Self-regulation. The group signed a voluntary safety accord covering internal controls, independent audits and board oversight. Trump called it “morally binding.”

No slow down! 

Meanwhile, Xi just left a two day visit to Washington with these formal remarks: “Both China and the United States are leading nations in artificial intelligence.” Competition “should be a race of catching up with one another, not a wrestle in which one either wins or loses.”

For the reasons we discussed above, Trump sees it as “whoever wins super intelligence, wins.” And he said just that today.

As we’ve discussed along the way, the more abundant intelligence becomes, the more valuable the scarce inputs become.

The U.S. is keeping its foot on the accelerator. That leaves physics as the only speed limit. That’s power, memory and equipment (physical inputs) that determine how fast this goes.

For that reason, you want to own scarcity in a world of abundance.

The 10-year Treasury yield traded to another two decade high today.

Last week we looked at the 5% level in the 10s, which has been kryptonite for financial stability in the recent past. But that recent past didn’t come with hot growth. It didn’t come with a productivity boom. And it didn’t come with a historic investment to build out the infrastructure for the fourth industrial revolution.

Keep in mind, the U.S. is now borrowing at 5.2%, but is growing (based on the Atlanta Fed model) above 8% (nominal). When an economy grows faster than its government’s borrowing rate, the debt burden shrinks relative to the economy.

And the move in yields is less about how much the government is borrowing, and more about who else wants to borrow. AI data center builders are competing with the Treasury for money.

Today, the Treasury Secretary hired a man who has been making the same argument.

David Zervos, Jefferies’ chief market strategist for nearly two decades, is joining Bessent as a counselor at Treasury. Just earlier this month, Zervos described the move in yields as “a large capital call driving real rates higher on expectations of very significant productivity growth. It’s about as positive a story that you could associate with higher yields as any story possible.”

In August, on the Treasury’s bond buybacks, Zervos said: “I don’t see how you could fight this when the firepower and the cards are all sitting in the Treasury Department.” That statement comes from someone who now sits inside the Treasury Department, with the firepower.

On a related note, we get August PCE on Wednesday (the Fed’s favored inflation gauge). Warsh already told us the number at his press conference: 3.6%.

The bigger inflation report is in Europe.

The euro zone reports September inflation on Friday, which is expected to jump to 3.7% from 3.2%. That’s the energy shock at work. And Europe’s energy premium ticked back up today, after Trump rejected Iran’s Hormuz proposal over the weekend. This all puts more pressure on the ECB to hike again when they meet next month (which would be a third time since June).

Lastly, we talked last week about Trump’s success in fortifying the Western Hemisphere. On Sunday, Brazil votes. It’s the largest economy in South America, and one of the three big countries in the hemisphere not yet aligned with Washington.