Over the past two weeks we talked about the signaling by Moody’s that a U.S. credit downgrade was coming.

They assigned a “negative outlook” to the rating in 2023.  That, by their definition, increased the risk of a rating downgrade “over the next one to two years.”

So, we are now two years out, near the end of that time window.  And on cue, in late March they telegraphed the downgrade with a warning that U.S. fiscal strength had “deteriorated further.”

And as we discussed in my May 8th note, that warning came ahead of expected budget and debt ceiling negotiations.

And if we look back at the S&P U.S. credit downgrade in 2011, and the Fitch downgrade in 2023, both surrounded … debt ceiling issues.

Now, interestingly, both of these prior downgrades occurred AFTER the debt ceiling was raised.

In 2011, S&P downgraded U.S. credit three days after the debt ceiling was raised.

In 2023, the debt ceiling was “suspended” which raised the debt limit until January 1 of this year (2025), giving the Yellen-led Treasury license to issue unlimited debt for the next two years (through the end of the Biden first term).  It was two months later that Fitch downgraded U.S. credit.

As for this Moody’s downgrade, not only was the news released Friday after the market closed, it comes while Congress is negotiating the budget and BEFORE the debt ceiling raise.

So, clearly this will create negotiating leverage and public talking points for the members of Congress that oppose the Trump plan.

This reminds me of the 2021 Fed influence on the Biden agenda.

Back in 2021, three trillion dollars of fiscal stimulus was already approved and working through the economy, to such a degree that the economy was already near a full V-shaped recovery (by late January, the time Biden took office).  

And the CBO (Congressional Budget Office) was projecting the economy to grow at a 3.7% annualized rate (hotter than pre-pandemic growth), with falling unemployment.

But the new Biden administration had a huge and very expensive climate agenda to fund.

It included an immediate $1.9 trillion massive spend (quickly approved).  Conveniently, the politicians on Capitol Hill justified it by citing the Fed (its view that inflation wasn’t a threat).

Then the Biden administration lined up another $4.5 trillion in deficit spending — again, justified by the Fed’s “transitory inflation” view, only to be derailed late in the game by a party defector, Manchin.

All of this to say, this downgrade from Moody’s looks politically motivated.

The question is, other than creating an impediment in budget talks, does it matter?

Moody’s is one of the three “Nationally Recognized Statistical Rating Organizations” designated by the SEC.  And it was Moody’s, and its two counterparts (S&P and Fitch) that brought us the real estate bubble, which turned into the global financial crisis.

Yes, that real estate bubble was primarily driven by credit agencies stamping AAA ratings on high risk/high yielding mortgage securities.  These unwarranted ratings were a mix of fraud, mal-incentives and incompetence (on the part of the ratings agencies).

With a AAA rating and a high yield, massive pension funds had no choice, if not an obligation to plow money into those investments.  And with that insatiable demand, mortgage brokers and bankers were incentivized to keep sourcing them and packaging them.  And the bubble was blown.

With that, it’s perplexing that they (the ratings agencies) are still in business, much less have credibility.

As we’ve discussed over the past month, Trump’s escalate-to-de-escalate strategy has been about drawing the rest of the world back into alignment with the U.S., using the U.S. consumer as leverage.

In addition, his Treasury Secretary, Scott Bessent, spent the past few days making the case to the world that the U.S. has been and will remain the best place for global capital. 

He reminded the world that “we have the world’s reserve currency, the deepest and most liquid markets, and the strongest property rights,” and for those reasons, the United States is “the premier destination for international capital.”

And to further drive home the appeal for global investors and governments, Bessent says the Trump administration’s goal is simply more: “more jobs, more homes, more growth, more factories, more critical manufacturing plants, more semiconductors, more energy, more opportunity, more defense, more economic security, more innovation.”

Now, as we’ve discussed, and part of the sales pitch, the second level of the “escalate-to-de-escalate” strategy is about isolating China.

And with that, over the past couple of weeks, the administration has been making significant public efforts to reduce China’s supply chain negotiating leverage over the United States and the rest of the world.

And it’s all about India.

VP JD Vance was in India two weeks ago, hosted by Modi, and he made a speech on U.S. and India’s shared economic interests.

It was strategic — a signal to the world that India is positioned to fill the supply chain gap for certain critical low-cost manufacturing, minerals, pharmaceuticals, etc., as a “fair” trading “friend.” 

This was clearly intended to contrast with China.

JD ended his speech by saying “the future of the 21st century is going to be determined by the strength of the United States-India partnership … if we fail to work together successfully, the 21st century could be a very dark time for all of humanity.”

It has since been said by Trump advisor Peter Navarro, that India will be the first trade deal. 

And it may come by the end of the week.  

Trump said today that he will make a “very, very big announcement” before his Middle East trip on Monday. He calls it “one of the most important announcements in many years.”

Maybe its something bigger. 

Remember, we talked a few weeks ago about the potential for “a grand coordinated deal, all at once (and probably over a weekend)?”  

There’s probably a reason, almost a month since “Liberation Day,” that no trade deals have been done. 

 What would a grand coordinated deal look like (a “Mar a Lago Accord”)?

Based on what’s been guided by key Trump advisors:  Tariffs get slashed, in exchange for countries opening up their markets (take down their trade barriers), boosting their defense spending, committing to buy more from the U.S., invest in American manufacturing, and buy our Treasuries — and a very critical piece:  isolate China.

How do they deal with China? 

The day after Vance’s speech in India, Scott Bessent called out the IMF and World Bank in a prepared speech, for the failure of these Bretton Woods institutions to stick to their mission.  Instead of upholding global stability, they allowed China to (my liberal paraphrasing) corner the world’s exports market through decades of currency manipulation, and in the process become the world’s loan shark. 

In short, Bessent called on the IMF and World Bank to return to their mission (do their jobs).  That would mean policing China.  Curbing it’s manipulative economic practices, which would result in reducing China’s global economic advantage and reducing their geopolitical influence. 

We talked last week about earnings of six of the seven AI kings.

The seventh, Nvidia comes later this month.

And remember, it was two years ago in Nvidia’s May earnings call that Jensen Huang shocked the world, declaring “the beginning of a major technology era.”  He told us there was a “rebirth of the computer industry” underway, where “AI has reinvented computing from the ground up.”

And he told us there was a “retooling” going on across the economy, the beginning of a 10-year transition of the world’s $1 trillion data center, to accelerated computing.

And he had the numbers to back it up.  They grew revenues by 19% that quarter, from just the prior quarter (!), with the outlook to grow over the next quarter by 52% (shockingly huge).

As you can see in the chart, this was the beginning of Nvidia transforming itself into an AI company (growing data center business from 60% of the entire Nvidia business, to now nearly the entire Nvidia business).

We’ve now heard from six of the seven AI kings on Q1.

Remember, just months ago there were questions about whether the huge capex plans from this group would go forward, after the DeepSeek disruption of late January.  

They answered the questions with $300 billion worth of capex planned for 2025. 

Meta just raised its planned capex by 10%.  And Apple just committed to spend $500 billionover four years. 

And Satya Nadella, head of Microsoft, gave several signals this week that the technology revolution is accelerating.   

He said they are bringing on data center capacity (and executing the plan to spend $80 billion in capex this year) but customer demand for those computing resources is outstripping their supply.  

And that has a lot to do with this:  The large language model capabilities are (in his words) “doubling in performance every six months.” 

And clearly there has been a significant breakthrough in the past month or so, as he said Microsoft processed 100 trillion tokens in the quarter, half of that in the past month alone.   

That AI workload processing is up five-fold from a year ago.   

This explosive growth is all about AI agents automating tasks, from designing infrastructure, building and executing marketing plans to developing software. 

With that, we should expect a productivity explosion ahead. 

And hot productivity tends to be very good for economic growth.  

Jerome Powell himself presented back in 2016 at the Peterson Institute (here), that high productivity growth is a driver of a higher long-term potential growth rate of the economy.  

That’s good news.  Because it means we can see real wage growth — the kind that restores purchasing power and quality of life (catching up to the reset in the level of prices). 

And importantly, productivity driven wage gains are non-inflationary because rising wages are offset by rising output. 

So, stepping back from the media and geopolitical noise, this is the big picture — we’re in the early stages of an industrial revolution.

If you want to own the stocks of the companies building the infrastructure to power AI, the companies delivering the capabilities of AI to hundreds of thousands of businesses, and the companies that will best leverage the productivity enhancements from AI, you can find them in our carefully curated AI-Innovation Portfolio.

If you haven’t joined us yet, now is a good time.