Let’s talk about Nvidia earnings.

It was three years ago, almost to the day, that Nvidia reported a growth shock that changed the world.

Remember, Jensen Huang told us that the world was beginning a trillion-dollar transition from general purpose computing to accelerated computing. And he said it started with the ChatGPT moment (the launch of OpenAI’s generative AI model, which crystallized productization of AI). 

He said the demand for Nvidia’s AI data center chips was so steep that the growth he just reported (in May of 2023) would be even bigger the following quarter. Moreover, he said the hyper-growth would continue for the foreseeable future.

That was the Nvidia moment. It was the moment the world realized AI was about to reinvent computing.

With that, the transformation has been bigger and faster than Jensen predicted. Still, there has been plenty of doubt about the significance and the durability of the AI revolution along the way. 

Then we had a series of “moments” earlier this year, that gave clear signals that the entire AI ecosystem wasn’t just sustaining, it was removing the ceiling on what is thought as possible for the economy.  

First, it was data storage. Sandisk reported $3 billion in revenue and then guided to $4.4 to $4.8 billion for the very next quarter — a 50% sequential leap in 90 days. The same shape as Nvidia’s famous 2023 guide. It was the moment the world realized AI doesn’t just need chips. It needs endless storage to hold the oceans of data those chips produce.

The Nvidia moment for storage had arrived. 

Then it was the chips themselves.

Taiwan Semiconductor, the company that manufactures the world’s most advanced semiconductors, reported a 20% jump in revenue in a single month, in what is normally a quiet, post-holiday lull. At the same time, its board greenlit a $45 billion plan to build more capacity. The bottleneck was starting to break.

The Nvidia moment for chips had arrived.

Then (in his Februrary earnings call) Jensen named the next moment himself. He said the “ChatGPT moment of agentic AI” had arrived.

Consider what that phrase means.

Not the Nvidia moment, but the ChatGPT moment (like, the beginning!). 

“Agentic” AI is moving the AI revolution into another gear. It’s the difference between AI as a tool a person uses, and AI as a worker that operates on its own.

And it’s always on, and always inferencing (always reasoning, producing output).

This is why in his February earnings call, Jensen said this line over and over: “compute equals revenue.”

Today, he said “it is very clear compute is revenues.”  Then he added, “compute is profit.”

Nvidia is proving that. 

The numbers in Q1 were jaw-droppers. Almost $82 billion of revenue in the quarter. That’s more than 10x the revenue of just three years ago. Almost $38 billion of revenue growth from the same period just last year. This, with net income margins in the mid 50s(%). 

Then there’s the guide. Nvidia told the market to expect $91 billion next quarter — another double-digit jump.

And Nvidia’s CFO told analysts that AI infrastructure spending is now on track to reach three to four trillion dollars per year by the end of this decade. 

That’s three to four trillion dollars, annually.

We’ve watched this estimate climb in real time. Last October, Jensen said there was half a trillion dollars of demand visible. By March, he had raised it to a trillion. Tonight, they put it at a three-to-four-trillion annual run rate.

With that, as we’ve discussed here in my notes, the day-to-day noise ( the rate guessing, the tariff headlines, the market swings on a given afternoon) is a conversation about ripples on the surface.

Underneath the surface, the largest industrial buildout in modern history is funded, profitable, and accelerating.

Yesterday, we talked about the repricing in the bond market — driven by a Fed regime change, which includes the end of forward guidance and the end of the implicit global backstop (no longer automatic, but ‘conditional’).

Today, we got to see ‘conditional’ materialize. 

Scott Bessent was in Paris, delivering the keynote at the No Money for Terror conference. He told the room of global policymakers and financiers this:

“The United States is hardly alone in facing the scourge of terrorism, especially from Iran. Yet, too often, we seem to be alone in our resolve to thwart it.” 

He then called on Europe, by name, to take action and expose Iran’s financing networks — unmask shell and front companies, shutter bank branches, dismantle proxies.

And he called on partners in the Middle East and Asia to root out Iran’s shadow banking networks (the China-Iran financial pipeline).

But this “alone in our resolve” statement was clearly aimed at Europe, along with “no room for excuses.”

We’ve talked about the Trump plan to restructure global trade and realign the world (away from China, back toward the U.S.), anchored by “burden sharing” — where allies and trading partners pay for access to safety (U.S. security guarantees), stability (the dollar and U.S. capital markets), and markets (U.S. consumers).

These are all no longer automatic, but conditional — conditional based upon alignment. 

And Bessent is making it clear that alignment includes: designate, expose, shutter, and dismantle Iran’s financing.

Or, stay ambiguous, as Europe has to this point, and discover what “conditional” looks like in practice.

And we’ve talked about the levers that Trump, Bessent and the new Fed Chair can pull to force political alignment — through consequence, not argument.

Withdraw all the backstops.

Let the bills come due (i.e. defense). Let the energy shock expose Europe’s energy dependence. Let the European financial system work through stress without the Fed’s dollar liquidity assistance.

Let the political class face the consequences of the costs their voters are no longer willing to pay.

With all of that said, remember, the endgame isn’t Iran. It isn’t Europe. It’s China.

And the China trip has become the trigger for phase two of the Trump administration’s effort to align Europe.

With Europe aligned, the global pressure can be applied to China, in coordination — to economically isolate China, further weaken its global influence, and end its multi-decade predatory economic strategy that nearly ushered in global dominance of the Chinese Communist Party.

Jerome Powell’s term as Fed Chair officially ended last Friday. He’ll continue in the role until the new Fed Chair, Kevin Warsh, is sworn in this coming Friday. 

But the bond market is already pricing a regime change.

German 10-year Bund yields broke out to 15-year highs at 3.19%. UK 10-year Gilt yields hit 18-year highs at 5.20%. The U.S. 10-year traded as high as 4.63% today — the highest level since days before Trump was sworn into office last year.

Remember, the Warsh doctrine is smaller balance sheet, lower rates (“AI is going to make everything cost less”), and true structural reform – to break the entanglement of the Fed with government financing.

If we listen to what Warsh has been saying since the summer of last year (when Trump began to turn the screws on Powell and Warsh’s name emerged as the Trump candidate), the days of the Fed backstopping bad fiscal policy and bad corporate behavior, via quantitative easing, should be over.

The fiscal dominance that’s been funded by the Fed for the better part of the past 18 years should give way to fiscal discipline (with crisis management given back to the Treasury).  

In this regime, the distortion of markets and outcomes created by QE is over. That should ultimately be good for dollar assets, good for the reserve currency status of the dollar.

So why are rates moving up?

Because the structural change under Warsh removes the Fed’s thumb from the scales.

Powell’s Fed manipulated outcomes through QE (outright buying assets) and through its “forward guidance” (shaping market opinion with words and forecasts, to create outcomes the Fed wanted). 

This new Fed regime is about less manipulation, less telegraphing, less Fed demand for long-dated Treasuries, more dissent and more volatility.

With that, the bond market is figuring out where yields should be, without the Fed’s thumb on the scales. Even if this Fed regime and the Treasury strike an accord to restore fiscal discipline, the bond market will doubt it, until proven otherwise.

Now, the biggest change under Warsh will be the Fed’s role on the international stage. The era of global coordinated central banking, led by the Fed, is likely over.

For fifteen years, the Fed has been the implicit backstop for sovereign debt fragility — not just in the United States, but globally. Through dollar swap lines. Through emergency asset purchase programs.

With Warsh (with the Trump-led Fed) that backstop is now conditional.

That’s why European rates are breaking out to highs not seen since the most intense days of the global financial crisis.

We talked on Monday about whether the Trump/Xi meeting would actually take place in Beijing, or if the trip would be cancelled or postponed (for a second time).

To this point, trade negotiations led by Bessent and Greer have been on neutral ground — Geneva, Madrid, Kuala Lumpur, Paris.

Trump landed in Beijing today, along with a delegation that includes Jensen Huang (Nvidia) and Elon Musk.

Here’s what he posted on Truth Social heading into the trip:

“I will be asking President Xi, a Leader of extraordinary distinction, to ‘open up’ China so that these brilliant people can work their magic. I will make that my very first request.”

“Open up” China.

That has been the false promise of the past few decades.

Every administration since China entered the WTO in 2001 has asked for it. The result has been the same. American companies China-influenced. Trillions in U.S. consumer spending channeled through Chinese manufacturing. IP theft on a mass scale. Supply chain dominance built. Critical commodities cornered, from rare earths to critical minerals to solar to batteries.

And with that, the Chinese economy has grown 50x over the past 35 years. Over the same period, the U.S. economy has grown just 5x.

That explosive growth made China the second largest economy in the world, and it was converging on the U.S. economy early in the pandemic. 

How did they do it?

It was no accident. They have executed on a plan to become the biggest, most powerful economy in the world. They did so, in large part, by undercutting the world on price, which enabled them to build an export monopoly. And they accomplished this by manipulating their currency — keeping it cheap. The world allowed it. They liked cheap stuff.

And they liked what China did with the dollars it collected from the cheap stuff. They plowed it into Treasuries, supplying cheap credit for U.S. consumers to buy more cheap stuff. And so the cycle has perpetuated through the years — transferring wealth from the U.S. (and the West) to China. 

That’s the trade imbalance that has broken the global economy, and has funded China’s influence building over the past decade.

And that’s what Trump’s trade deals are repairing and realigning.  

With that, it was five years ago that then-Secretary of State Mike Pompeo’s Nixon Library speech — a call for “a new grouping of like-minded nations, a new alliance of democracies” to take action against the Chinese Communist Party.

Pompeo had been alliance-building with Australia, India, Japan, Vietnam, South Korea. His warning then: if we don’t act, “the CCP will erode our freedoms and subvert the rules-based order that our societies have worked so hard to build.”

The bilateral architecture Bessent has been building over the past year is the Pompeo framework. Tokyo this week. Korea today. The Quad expanded. Gulf states. Israel publicly moving “from aid to partnership.”

As we’ve discussed in my notes, the aligned-partner architecture gets coordinated U.S. support: security, energy, dollar liquidity.

So going into this meeting, what’s different?

What’s different is what the Trump administration has done to shore up that architecture.

1) The dollar has been reaffirmed as the world’s reserve currency.

And reinforced through the digital architecture — regulated Treasury-backed dollar stablecoins are now the global digital payment infrastructure.

2) The U.S. is the world’s largest oil producer.

The Iran war has positioned the U.S. as the replacement supplier for Asian buyers who can’t access Persian Gulf oil. Trump named the U.S. as “a big filling station” on Sunday. We have economic and military control over Venezuelan oil. And we will soon effectively control Iranian oil flows. 

So, Trump goes into meetings in a position of strength.  And he has the AI chip carrot  (Nvidia’s H200 chips), the Taiwan stick (a $14 billion arms package), and the China tariff truce (currently suspended triple-digit tariffs) to leverage. 

April CPI came in hot this morning.

Headline inflation jumped to 3.8% from 3.3%.

Core CPI accelerated to 2.8% from 2.6%. The spike in oil prices is clearly in the inflation numbers. 

But what accompanied the bottom in inflation, which happened before the Iran strikes?

The Fed’s December stop and reverse on the balance sheet — the return to balance sheet expansion (which is inflationary). 

And as you can see in the next chart, with the Fed holding the effective Fed Funds Rate at 3.64% throughout the year, today’s 3.8% headline inflation print creates negative real rates (Fed Funds Rate minus headline inflation) for the first time since 2023. 

As you can also see in the chart, the last time real rates dipped into negative territory was late 2019 — and the setup was identical. The Fed flip-flopped — they followed a quantitative tightening campaign by returning to balance sheet expansion, to respond to “strains in the money markets” (i.e. tightening liquidity conditions).

Liquidity tightened. The Fed prioritized liquidity over inflation. Real rates went negative.

All of this comes the week Kevin Warsh takes the helm as Fed Chair. And his view has been, smaller balance sheet, lower rates.

In my last note, we talked about the latest sentiment massage from Trump on Iran.

Last week, it was Operation Epic Fury “is over.”

Though operationally (the reality, the physics) nothing had changed.

And then Sunday afternoon, the ninth sentiment massage of the past ten weeks ended with this…

From Wednesday’s “OPEN TO ALL” peace pivot to Sunday’s public rejection. The sentiment massaging cycles keep getting shorter — six days, then five, then four. The reality on the ground has continued in one direction. 

Then on Sunday night, Netanyahu sat down with 60 Minutes and confirmed the war isn’t over — “it’s not over because there’s still nuclear material, enriched uranium that has to be taken out of Iran.”

Trump reiterated that today, saying the uranium has to come out.

Also, while taking press questions in the Oval Office, Trump said this about the war:  he said he’d expected the stock market to drop 20-25%. He said he was willing to do it because Iran couldn’t have a nuclear weapon and the threat had to be addressed.

The stock market is at new record highs because the geopolitical strategy is fueling a wartime industrial mobilization, and the AI revolution is transforming the economy.

The “boom loop” we’ve been describing is clearly showing up in the numbers. More spending on AI infrastructure is leading to more revenue, is leading to more spending on AI infrastructure. 

More capacity equals more revenue.

With that, the past few weeks have been overwhelmingly about earnings and the state of AI. 

Let’s talk about the big events of this week.  

Kevin Warsh should take the helm as Fed Chair on Friday. The new Fed regime starts, and the globally coordinated central bank era (likely) ends.    

On that note, Bessent is in Tokyo today through Wednesday meeting with the Prime Minister, Finance Minister and Bank of Japan Governor. Aligned partners get U.S. support (security, energy, dollar liquidity).

And the big one:  Trump is due to meet with Xi in China, traveling Wednesday night. And they are said to be bringing a large delegation, cabinet members, and American business leaders. This sounds like the Davos playbook (when they visited the World Economic Forum earlier this year, and set the tone for American leadership).  

Beijing is not Davos. 

As we’ve discussed, the administration has made no secret over the past year that dealing with China’s predatory three-decade economic war is priority number one. And as we’ve discussed, the industrial mobilization under Trump, and the fortification of the Western Hemisphere, seems to be for a bigger confrontation than Iran.

With that, putting the President physically in China introduces unnecessary risk at worst — and at best, reduces control and leverage. Even our trade negotiations (led by Jamison Greer and Scott Bessent) haven’t been IN China. They’ve been in neutral sites (Switzerland, Spain, Malaysia, France).  

Although Trump played up his excitement about the visit today, I suspect the chances of it being cancelled, or postponed (for a second time) are not small. 

We will see.

The question: if it’s pushed again, what will be the reason? 

When the April meeting was pushed “5-6 weeks”, it was said to be conditional on China helping unblock Hormuz. That hasn’t happened.

If it gets pushed again, it reinforces the direction of travel toward confrontation with China.  

While the AI revolution continues to grow the economic and market pie, the geopolitical pie continues to be re-portioned.

Trump has used the past thirteen months to realign the world, away from Chinese influence, and back toward American leadership using the American consumer, security and energy as leverage.

This, as we’ve discussed throughout the past year, is the effort to create the global alignment needed to isolate China, to end China’s multi-decade economic war on the world. 

That said, Europe has to be on board, and yet the leadership in Brussels continues to walk the line of ambiguity, if not testing a plan B where they pursue a “third pole” of global power — which is only viable if they drift into further alignment with China (economically).

With that, Trump has levers to pull, to force their hand. 

The levers:  1) Withdrawing U.S. backstops and enforcing “burden sharing.” That creates massive reindustrialization/spending requirements, which puts pressure on already stressed sovereign balance sheets in Europe. 

2) Iran. The Iran War has created an energy shock that has exposed Europe’s energy dependence.  Europe now pays six times what America pays for natural gas — which puts pressure on already stressed sovereign balance sheets in Europe. 

3) Japan. Over the past week, Japan has intervened to support the yen. Japan’s top currency official said they face no constraints on how often they can intervene, and that it is in daily contact with U.S. authorities. 

Keep in mind, for years one of the quiet pillars of the global financial system has been cheap Japanese money. Near-zero rates in Japan made the yen the funding currency for global risk taking. Borrow yen, convert it, buy higher-yielding assets around the world.

It’s a key source of global liquidity. And when a major source of cheap funding starts to get squeezed, so do markets dependent upon that funding source.

That said, the yen carry trade has been slowly repricing over the past two years by the rising path of Japanese interest rates. And now we have yen intervention, with Washington openly in the loop (the currency market is Bessent’s wheelhouse). 

If this recent currency market action is about repricing one of the cheapest funding channels in the world, thoughtfully, as to not create a global market accident — then where would that funding pressure matter the most?

Europe.

Already vulnerable. Weak growth. An energy problem. Fragile sovereign debt. And a political class that has resisted alignment with Washington.

So, is yen intervention another lever to tighten the screws on Europe?

Maybe.

With that backdrop, let’s consider what has happened in recent days. 

Trump called on Germany’s Merz to fix his broken country. He pulled 5,000 troops out of Germany. Rubio suggested withdrawing 100,000 U.S. troops from Europe.  And then today, he posts this …

Great call. Then an ultimatum. Get all 27 EU members to sign off on the U.S./EU trade deal by July 4th, or tariffs “jump to much higher levels.”  There’s no chance that happens.  

On Iran. As of yesterday, Epic Fury “is over” as declared by Trump and Rubio. But operationally (the reality/the physics), nothing has changed.

The damaging energy shock/tax on Europe continues, indefinitely.   

Last week we talked about “the inference inflection.”

Seagate had just told us its top three cloud customers had nearly doubled their remaining performance obligations to $1.1 trillion, and that storage was sold out through 2027.

It was a strong clue that the hyperscalers would guide capex higher when they reported.

They did.

As we discussed, they are spending whatever it takes to build the infrastructure.

Because more supply (more compute) equals more revenue. 

Now the demand side is proving out.

Yesterday Palantir reported the strongest quarter in its history. Revenue grew 85% year-over-year, the fastest pace as a public company. U.S. Commercial revenue grew 133%. U.S. Government grew 84%. And the full-year guidance was raised to 71% growth, ten percentage points above the prior guide.

And this is the graphic that tells the story about the state of AI.

Palantir is now in rare company with Nvidia, Micron and SK hynix (of South Korea) as a rule of 145+ company (a measure of revenue growth + operating margin).  

AI has made each of those four companies faster growing and more profitable — with no end in sight.

So, Palantir is now positioned alongside the chip and memory companies that build the AI revolution — which implies the AI software application layer is part of AI infrastructure.

This is the big takeaway: Agentic AI (which Palantir is building for enterprises) is consuming compute the way data centers consume power.

It’s always on, and always inferencing — the “inference inflection.”

We’ve been building the AI-Innovation Portfolio around this thesis since June 2023. Endless demand drives outsized value at the companies that provide the scarce infrastructure resources of this fourth industrial revolution. Join us here, or click below for more details on how we’re positioned and why.

In my last note we walked through Jerome Powell’s recent FOMC press conference.

The departing Fed Chair was again silent on the balance sheet expansion (for a third consecutive press conference). Meanwhile, they’ve added $170 billion worth of Treasuries since December.

And remember, Powell said in December the expansion would continue “indefinitely.”

Conversely, Kevin Warsh, the incoming Chair, has said publicly the balance sheet needs to shrink.

So, the path of the Warsh-led Fed has been telegraphed. And it’s eleven days away.

As we’ve said often in the post-GFC era of Fed asset purchases (balance sheet expansion) — the resulting liquidity injection tends to make stocks go up.

With that, will stopping and reversing on the balance sheet prick the exuberance of the stock market?

To front-run this debate, Stephen Miran (Trump’s appointed Fed Governor) delivered a speech in late March at the Economic Club of Miami.

He told us how they are positioning this balance sheet regime change.

In this speech (see it here) Miran reframes the entire “reserve scarcity” problem, tying it to bank regulation.

He notes that the “ample reserves” framework Powell uses to justify indefinite balance sheet expansion is not a natural feature of the system. It’s a function of Dodd-Frank and Basel.

Specifically, the liquidity coverage ratio requirements force banks to hold large reserve balances. The internal liquidity stress test standards do the same. Banks are not holding $3 trillion in reserves because they want to. They are holding it because the regulators require it.

So the demand for reserves is dictated by regulation, and that’s the lever the Trump administration intends to pull.

The first item on Miran’s list of paths forward is to ease the liquidity coverage ratio and the internal liquidity stress test standards.

Lower the regulatory demand for reserves.

Then the balance sheet can come down without creating the scarcity that would pressure short-term rates higher and break the funding markets.

Then, as an offset to shrinking the balance sheet, they will lower rates.

So the playbook is deregulate the demand side for reserves, shrink the balance sheet passively, pair it with rate cuts.

What does that mean for markets?

Lower policy rates are a tailwind for equities. The Fed exits the government financing business, which lowers the fiscal profligacy premium embedded in long Treasury yields for the past fifteen years.

Less distortion. More efficient capital allocation.

And the regulatory relief on banks frees up bank lending capacity that has been constrained since 2010. U.S. banks specifically benefit.  The economy benefits as the liquidity that’s been trapped in banks becomes loans to consumers and businesses. 

This is structurally pro-growth, pro-equity, and pro-credit.

The conventional view is that Warsh’s balance sheet reduction threatens markets. The Miran framing makes the case for structural reform/structural strength — which should be good for stocks, good for the dollar and dollar assets.