Yesterday we looked at the war premium Europe is paying for energy.
This is the catalyst of the doom loop for Europe.
Energy dependence raises inflation. Inflation forces rate hikes. Higher rates raise sovereign funding costs. Funding costs raise political pressure on the European Central Bank to intervene (to push borrowing rates back down). But ECB intervention will be impotent, unless the Warsh-led Fed is there for support.
And if we pay attention to the Fed leadership candidacy contest of the past year, and the geopolitical squeeze the Trump administration has put on Europe, that ECB support from the new Fed will come ONLY with political conditions — the same conditions European officials have been resisting.
So, that's the doom loop we've been talking about for many months. It continues to progress.
Let's talk about the boom loop, in America, which also continues to progress.
We're in the first week of a big earnings season. The banks have reported blowout numbers. Equity markets revenue, investment banking revenue (IPOs), AI capex financing — all booming.
But at the same time, IBM pre-reported, and the stock had its worst day ever. Down 25%.
It wasn't because demand is weak. It's because demand for AI hardware is so strong that its customers raided their software budgets to buy servers and memory chips before prices rise again.
That's a structural demand signal. The scarce core inputs to produce artificial intelligence are so valuable, companies are locking down supply years into the future.
With that, as we step through earnings season, the Wall Street focus continues to be on signs that AI is actually creating value for companies that are NOT selling access to the core AI infrastructure.
Is AI actually making the companies that are buying access to the core AI infrastructure more efficient, making companies more profitable (wider margins)?
Profit margins are indeed rising. S&P 500 net income margin is expected at 14.2%, almost 200 basis points over the five-year average (according to FactSet). But that's pulled UP by the very healthy, and expanding margins in the tech sector. Otherwise, there is a balanced mix of sectors with margins both expanding and contracting.
With that, let's talk about a comment from Jamie Dimon on the JPM earnings call yesterday.
When asked about the benefits of AI in the business, he said this: "you don't uniquely benefit from AI. The ultimate beneficiary of AI will be our customers."
He said they will use AI to do a better job for customers. It won't accrue strictly to the benefit of JPM, via margins — "if that were true, our margins would be 80% today because of computerization of the last 20 years."
With that in mind, 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…
