Gold closed up 4.1% today. And as you can see in the chart below of historical one-day price changes, we’ve only seen three episodes like this since 2019. 

Let’s talk about what was happening in these two other episodes. 

Gold closed up 4.1% on April 6th, 2020. 

What was happening? 

We were less than a month into the pandemic. Global central banks and governments had gone all-in, pumping stimulus to keep the economy alive. And there were signals from data in New York and Europe that infections and death rates might be slowing. And with that, the move in the gold market was the contemplation of the inflationary impact of the massive liquidity that was dumped onto the economy from the pandemic response. 

Episode number 2:  This was late January/early February of this year.  Gold swung sharply. Up 4.1% on January 28th. Down 12% over three days, and then a 5.9% bounce. 

What was going on? 

The Fed met and held rates steady that day, as expected. 

And remember, it was a month prior that the Fed started buying Treasuries again to address a liquidity problem that was bubbling up. 

Like 2019, it was “strains in the money markets” again, that prompted the return of Fed action. 

Not only did they start with $40 billion worth of short-term Treasuries (what Powell himself described as ‘big’), but he said the situation would require ongoing $20-$25 billion a month (a perpetual liquidity injection — up to $300 billion a year, indefinitely).

This pro-liquidity pivot was pro-asset prices.

And one of the clearest reactions was in gold:  it moved up 34% in the 35 days going into that January 28th meeting.

Two days later, Trump named Warsh as his guy for Fed Chair. And markets spent the day unwinding the ‘fiscal profligacy trade,’ and selling the ‘easy money trade.’  With that, the market narrative on Warsh painted him as an inflation hawk.

Spot gold collapsed 9.8% that day.

So, what is today’s outsized move in gold about?

Perhaps an acknowledgement of a new Fed/Treasury regime. A Fed Chair that promotes his committee’s dissents (three votes for rate hikes last week), while rejecting the dissenters “old Fed” mental model by publicly saying that pushing down demand (via higher policy rates) until it meets supply is “not my mental model” (at least in the current circumstance). 

Meanwhile, the Treasury Secretary spent this past week reorienting dollar policy.

On Friday the U.S. bought yen for the first time since 1998 — trading (selling) euros for yen.

And Bessent said Washington will do “whatever it takes” to support Japan, and asked the Fed to expand the facility that lets foreign central banks borrow dollars against their Treasuries instead of selling them.

With this event, the guaranteed dollar swap lines (dollar liquidity) managed by the old Fed, may now be conditional dollar liquidity dictated by the Treasury — conditional on alignment with the U.S. administration.

So, what do all three of the outsized gold days of the past seven years have in common.

Each was a moment when the architecture of dollar liquidity changed.

Who supplies the dollars, and on what terms.

 

Palantir reported after the close.

Revenue was up 93% from a year ago. Net income was up three-fold from a year ago ($1.07 billion, against $329 million).

Adjusted operating margin came in at 62%. So, add that to 93% growth and you get a Rule of 40 score of 155.

That said, this is a stock that was trading down 29% on the year into today’s close (35% below its all-time highs), just prior to the earnings release. 

And now we know the company grew faster in the recent quarter, became a more profitable business, and raised the outlook. 

The decline in the stock was not related to the business. It was about market positioning.

That has been the theme for AI stocks all summer. And it’s a gift.

Why? It’s in Elon’s post this morning. 

This chart describes the “singularity curve.” In singularity, AI capabilities broadly exceed human intelligence, and can rapidly self-improve.

Progress stops feeling linear and starts feeling vertical. So, the change is no longer a little better every year. More like: the world changes fast enough that the old way of thinking breaks.

Elon said months ago that we are there.

AI understands its own code and hardware. It begins rewriting its own software more efficiently. The progress accelerates because it can rewrite itself faster and more effectively than before. The cycle repeats exponentially, leading to a massive and accelerating leap in capability.

And the next phase, robots.

Models self-improving, leads to robots building robots (self-improving), which leads to machines doing physical work. And that will effectively create unlimited labor, and therefore, ultimately, a limitless-sized economy.

So, Wall Street has spent this summer debating whether the capex is too big. Debating whether the multiple is too high. Debating whether Alphabet should blow all of its free cash flow (and then some) to build more datacenters/buy more chips. 

Those are ripples on the surface. As Elon has said, if you knew a tsunami was coming, would you bother cleaning up the beach?

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The Fed held today. Three members dissented and wanted a hike, the biggest divide in 10 years.

In the press conference, for forty-five minutes the financial media expressed their displeasure with the decision. Inflation (PCE) is over 4%. Employment is full. Why aren’t you raising rates?

AI capex is running hot. Oil prices have had wild surges.

Raise rates, slow the economy, cool the prices.

Bring demand down to meet supply.  

That is the model the old Fed has run. Warsh says pushing demand down until it meets supply is “not my mental model.”

He is not starting from the assumption that demand has to come down.

He described a race between supply and demand, and he is giving supply a chance to show itself.

Unlike the old Fed, a good economy doesn’t have to be taken out back and shot. When demand outstrips supply, it should incentivize building — more productive capacity in the economy, more supply.

That leads to cooler price pressures, and a bigger, more robust economy. 

And as we’ve said, the productivity gains from AI should be structurally disinflationary. 

We know this is the Warsh view. He called productivity strong. And it’s easy to see why he wants to give it more time, and it’s also easy to see why the old Fed regime that still sits in the room wants to aim and fire at the culprit of hot demand (AI infrastructure).

Warsh fought off the room full of financial journalists that wanted their rate hike with this: “nominal and real yields are materially higher across the Treasury curve” … “market participants are learning to play the ball, not the referee.”

So, he said rates are higher since the last time the Fed met. The market has tightened financial conditions in the past month, without the Fed’s steering, or outright policy rate change. 

That said, Warsh made this comment about the old Fed’s preferred inflation gauge, PCE (which we’ll get tomorrow, for the month of June) — he said, “I’m looking at a broader set of inflation data than PCE.”

Remember, earlier this month, in a report prepared for Warsh’s first Congressional testimony, he criticized the timeliness of the data the Fed depends on.

So, it’s fair to assume he’s looking at a mix of real-time data (private and public), as are the top companies in our economy. And with that, he reminded the room of journalists that inflation has been above the Fed’s 2% target for 63 months. But for the 64th (which will be the July number) he says “the final calculation might be a close one.” 

If he’s talking about core cpi, a negative 20 basis points for July would bring the year-over-year down to 2.0% — for the first time since March of 2021.  

We get the Fed tomorrow. It’s the second Fed meeting with Kevin Warsh at the helm. 

The market is pricing the odds of a rate hike at roughly 30%, and better than a coin flip on two (quarter point hikes) before year end.

The old Fed doesn’t like to disappoint markets — using forward guidance to steer expectations, then citing market pricing to justify their move.

With that, in his first press conference as Chairman (on June 17th), Warsh said this: “I’ve said for years, inflation is a choice.” Then he told the room the committee is unanimously determined to deliver on price stability. 

Wall Street heard a hawk.

The Fed’s preferred inflation gauge (PCE) days later printed 4.1%.

If inflation is a choice, and you’ve promised to fix it, you hike rates. Right?

Not so fast. The Warsh-led Fed, if we listen to his words, is not the old Fed.

The “Warsh doctrine” has been laid out for the better part of the past year, since Jerome Powell’s job was under threat, and Warsh became a short list candidate. He began to publicly sell his policy views. 

And if we listen to those views along the way, we know he sees inflation getting back to the Fed’s target by way of two drivers: 1) a smaller balance sheet, and 2) AI — “AI is going to make everything cost less.”

Those two do the work.

First, the balance sheet. Fifteen years of expansion, which we’ve long argued is what carried gold from under $1,000 to over $5,000, was a quantity-of-money story, not a rates story. 

And remember, the Powell Fed stopped and reversed on the balance sheet as Powell was walking out the door (stopped shrinking, started expanding again as of December). The Fed has added $212 billion to the balance sheet in seven months.  

The second piece, Warsh thinks artificial intelligence is a structural disinflationary force.

In his first press conference last month, he called it “American ingenuity.” He said strong, productivity-led growth is “not something that we fear, but something we embrace.”

So, the old Fed raises rates to slow the economy down.

The Warsh-led Fed thinks the economy running hot on productivity is the cure, not the disease.

You do not hike into your own cure.

We heard from Google on Q2 last week.

They spent $44.9 billion on capital projects in three months, produced negative free cash flow of $5.9 billion, and raised the 2026 spending plan to $195 to $205 billion.

This week we hear from Microsoft and Meta on Wednesday. Amazon and Apple on Thursday.

Together with Google, these four are on track to spend about $700 billion this year, against roughly $410 billion last year. Wall Street expects the number to approach a trillion dollars in 2027.

This shouldn’t be news to anyone who has been paying attention.

Remember, last October, the man who supplies the most advanced AI chips in the world said he could see half a trillion dollars of demand on the books through 2026.

By March he had doubled it. At least a trillion dollars through 2027.

And he went further, saying he was certain computing demand would run higher than that. His words on supply were plainer still: “we are going to be short.”

Then in the May earnings call the Nvidia CFO projected three to four trillion dollars a year in AI infrastructure spending by the end of this decade.

The numbers from the companies selling access to that compute keep backing it up. Google reported extraordinary demand last week. Cloud revenue grew 82%. Contracted backlog reached $514 billion.

So why is Wall Street wringing its hands about capital spending?

Keep in mind, these are companies producing tens of billions of dollars in operating cash flow, quarter after quarter, and putting that cash into capacity that is already sold.

But what about the debt raises?  Not only are they spending their operating cash flow, now they’re borrowing. 

When demand is growing faster than you can fill it, and the operating profit on that capacity covers the debt service roughly nine times over, levering the balance sheet is exactly what a shareholder should want.

And that kind of operating leverage is normally rewarded.

But Wall Street seems worried about the spending. Worried about the borrowing.

The only reason to worry about either is if you are worried about demand.

But they don’t seem to be worried about that.

Why?

Because agentic AI means model usage is multiplying by the day, and has been since February, when the agentic moment arrived.

Now add the proliferation of open source models, now at or near the level of the best in the world — and demand for compute goes up, not down.

More models, running in more places, doing more work. That is the justification for more capacity, arriving just as the companies best equipped to build and supply it are spending more and planning to spend more — as they should be.

The ECB met today. Remember, in Europe, before the Iran war, the market was pricing rate cuts/easier money to stimulate weak economic activity. 

But soon after the first strikes on Iran, and the related energy shock that followed, the interest rate market started pricing in as many as three rate HIKES to counter the expected energy-induced price pressures.

So, what happened today? 

They held rates steady.

And Lagarde acknowledged that the risk to growth is to the downside, while the risks to inflation are to the upside. 

So, growth is weakening while inflation pressure builds.

That’s the trap for the ECB. Respond to one side, exacerbate the other. The culprit is the energy shock (drives prices higher, while simultaneously dragging the economy lower).

And as we discussed earlier this week, this is the chart (below) that explains the economic squeeze in Europe. It’s the premium Europeans are paying for energy (Dutch TTF Natural Gas) relative to Americans (Henry Hub Natural Gas) — and it has been ramping aggressively higher all week. 

The multiple hit 7.1x today, a new high for the war, above the March peak.

Now, let’s revisit this next chart we looked at back in March…

This chart above represents the risk premium in Europe.  

Both the red and the blue lines show the key spread between Italian yields (Europe’s most fiscally fragile major bond market) and German yields (the anchor). 

The red line is the 2022 period surrounding Russia’s invasion of Ukraine.  The blue line is the current period (101 trading days into the war).  Everything to the right of the black vertical line is the market reaction to the war catalyst.

Now, the obvious observation is that the blue line is much lower than the red line. The current spread between German and Italian yields is much tighter in this U.S./Iran War (and related energy shock). 

Is that because the risk to Europe is significantly less?

Well the Italian yields component is signaling a similar degree of risk as it was in 2022 — trading over 4%, which is a level back in 2022 that European sovereign debt (generally) started showing stress, which compelled the ECB to act. The ECB restarted QE (QE by a new name, the “Transmission Protection Instrument”) to stabilize bond markets of the weak euro zone countries.

So, this time, Italian yields are back above 4% (up more than 50 bps this month alone). But the spread remains tight relative to the 2022 market stress.  Why? Because German yields (the historic low borrowing-cost anchor of Europe) are now more than two times higher than in 2022. 

The fiscal rock of Europe isn’t what it was just four years ago.

So, the tighter spread isn’t telling us Europe is safe. It’s telling us the anchor has moved.  

 

We heard from Google today on Q2. The capex boom continues, and the AI boom continues. 

Google spent $44.9 billion on data centers and chips in ninety days. That’s double a year ago. Full-year guidance was raised from $180-$190 billion to $195-$205 billion.

But the loads of quarterly free cash flow that Google has been funding its infrastructure investments with for the past three years, has gone negative.

Free cash flow is what’s left after a company pays its bills and builds its infrastructure. And Google has been one of the greatest free cash flow machine in the history of capitalism.

Over the past five years, Google has generated about $17 billion in FCF (on average) every quarter — until now. 

This quarter it burned $5.9 billion more than its operating cash flow.

And not only are they drawing down in excess of that monster, record $39.1 billion operating cash flow, they are borrowing money to fund the infrastructure spending — more than $50 billion in new debt since the beginning of the year.

Why do it?

Because the demand side is extraordinarily strong.

Cloud revenue grew 82%, to $24.8 billion, against Wall Street expectations of 64% growth. The backlog of signed, contracted future cloud business now stands at $514 billion. Those are contracts, not projections. Google’s models are processing 22 billion tokens a minute, up from 16 billion just one quarter ago.

With that demand, and that backlog, the faster they build, the more they monetize.

Over the past year, Google Cloud produced 54 cents of additional operating profit for every additional dollar of revenue. So, they borrow money at mid-single-digit rates, and turn that into datacenter revenue that generates better than 50% incremental operating margins.

Those are the economics behind the cash flow drawdown, and the borrowing. 

Remember, as we discussed last week, the AI inputs are scarce (advanced chips, memory, power, compute), margins are historic. Where AI output is abundant, competition hands the gains straight to the customer.

Google sits on both sides.

It ships ever-cheaper models on one side driving the abundance — and on the other side it’s now borrowing money to buy more of the scarce, high growth/high margin stuff.

The world’s biggest customer of the chokepoints (the compute) just told us the chokepoints are worth levering the balance sheet for.

The market ran ahead of big tech earnings today. The AI names ran, the Nasdaq closed up 1.3%, and the major indexes broke a three-day losing streak.

Meanwhile, the dollar, yields and commodities are all going higher.

The 10-year touched 4.64%, its highest since late May, and the long bond sits above 5%, near the top of its multi-year range. Italian yields at 4%. German yields above 3% (around 15-year highs). UK yields above 5%. 

Crude oil has now spiked 27% in 13 trading days on aggressive U.S. strikes on Iran. Higher energy prices are pushing yields higher. Higher yields are pushing the dollar higher. A stronger dollar has pushed dollar/yen past 163, its weakest since 1986.

Last month Japan’s finance minister and Bessent held a currency call and said they would take “bold steps” if needed. The officials drew a line. The market has walked straight through it.

Next, commodities. Silver jumped about 4% today. Gold is bouncing, after a six-month 30% correction — despite real yields climbing.

What does it all mean? It looks like markets pricing in risk of bigger, longer global energy supply disruption — more war. 

Halliburton’s chief executive said today that rebuilding reserves and supply runs “years, not quarters.”

Maybe the cleanest signal is in this chart …  

This (normalizing for unit of measure and exchange rate) reflects how much more Europeans are paying for energy (Dutch TTF Natural Gas) relative to Americans (Henry Hub Natural Gas).

It peaked a couple of weeks into the war.  Now, here we are more than 140 days in, and we have a new high (of 6.95x).  

Last Wednesday we made the case that AI’s gains accrue to users and builders, not to a permanent margin explosion for the companies using it.

We’ll learn more this week.

To this point, we’ve seen the clear gains continue to accrue to the primary AI chokepoint for world chip supply, Taiwan Semiconductor. 

Last week they reported record revenue and profit up 77%. 

Gross margin expanded to 67.7%.  Operating margin was up to 60.3%. Net profit margin was 55.6%.  The year prior, those margins were 58.6%, 49.6% and 42.7%, respectively. That’s a massive scale business doing 9 to 13 points of margin expansion in one year.

Now, let’s look downstream.

Netflix told shareholders it used generative AI in roughly 300 titles this year. Battle scenes, crowds, entire sequences. Its co-CEO said one documentary’s AI footage came “twice as fast and at half the cost,” and that without the tools, productions “would have left out those key shots.”

So AI is everywhere in the product. But revenue growth is decelerating, from 16% to 13% to 12% guided. The gains went to viewers, who get bigger shows, and to creators, who get bigger tools. They did not go to margins.

And IBM, you’ll remember, warned on its quarter because customers redirected software budgets to buy scarce servers and memory chips.

So, in companies producing inputs that are scarce (advanced chips, memory, power) the margins are historic. Where AI is abundant (content, enterprise software) competition hands the gains straight to the customer. Jamie Dimon said exactly this on his earnings call last week — the ultimate beneficiary is the customer.

The productivity benefits are arriving for users and end consumers of AI, though it’s not hitting the income statement (at least yet) for most companies.

That said, it’s early in Q2 earnings season. We’ll learn more this week.

Wednesday, we’ll hear from Google (Alphabet). This is the first big hyperscaler to report. And it’s all about the capex plan.  The Wall Street community continues (for yet another quarter) to speculate about a capex slow down.

The suppliers of the most advanced chips in the world say otherwise.  

The TSM report shows pedal-to-the-metal, and if we listen to Nvidia’s CFO two months ago, she told us “AI infrastructure spending is on track to reach $3 to $4 trillion annually by the end of this decade.” That’s per year! 

Google will be a big share of that $3-$4 trillion.

They’re already on the record to spend $180-$190 billion this year, with a “significant increase” signaled for 2027. The infrastructure investment is accelerating, not slowing.    

  

 

 

Take a look at this chart.

The orange bars are the price of European natural gas. The white bars are the yield on Italy’s 10-year government bond.

As you can see, the rise in European natural gas prices, due to the structural supply shock in the middle east, has resumed since the beginning of July. 

And because of what a sustained spike in energy prices does to the fiscal situation in the weaker spots in Europe, Italian 10 year yields are rising with it step for step.

That’s part of the doom loop formula for Europe, that we revisited yesterday.

Expensive energy drives European inflation. Inflation forces the ECB to hike. Hikes drive up the borrowing costs of Europe’s most indebted governments.

The gas price is a bond market problem. And the chart above tells the story.

Let’s talk about the boom loop.

The market has spent two days selling the AI trade. Chip stocks, memory makers, the whole supply chain. The second shakeout in six weeks.

But let’s look at what’s actually happening. 

ASML raised its full-year sales forecast — for the second time this year.

IBM told us its customers raided software budgets to buy servers and memory chips before prices rise again.

A Chinese lab just released the largest open-weight AI model ever built. How was it built/trained?  With a lot of computing power.

And on that note, we heard from Taiwan Semiconductor this morning. TSMC manufactures nearly every advanced AI chip on the planet. It sees every order book in the industry.

They reported record revenue (up 36%), record profit (up 77%). They raised full-year revenue growth forecast to more than 40%. They raised capital spending plan by $8 billion, to as much as $64 billion, and said the next three years will be “even more significantly higher.”

They continue to build more capacity to meet more demand. 

They committed another $100 billion to fabs in Arizona. And the Chairman said, “our conviction in the multi-year AI megatrend remains very high.”

The stock fell.

The one caution in the report was on consumer devices, where rising component costs are beginning to bite. It’s not a demand problem, it’s a bottleneck problem — another “scarcity” story. Every major tech player is aggressively over-ordering to secure scarce capacity.

So, the evidence this week went one way. The stock prices have gone the other.

But the underlying theme continues to strengthen. In a world racing toward abundance, you want to own the scarce things that abundance can’t exist without.

That’s what our two portfolios are built around. Our AI-Innovation Portfolio owns the scarce physical inputs the buildout cannot exist without. Our Billionaire’s Portfolio owns the still-undervalued producers of the hard assets that feed it.

Two portfolios driven by one thesis. If you’re not yet a member, it’s a good time to get positioned. Learn more here.