Marco Rubio was in India today, and said nearly every country he talks to has a diesel problem. And he said it’s no longer just about the Strait of Hormuz, it’s about the attacks on Saudi pipelines, and on refineries in the Russia-Ukraine war.

Europe’s economy runs on diesel. And France is now lining up diesel shipments from Saudi Arabia and the UAE.

So, as we discussed earlier this month, the energy market in Europe is doing the tightening (downward pressure on the economy). And the bond market is beginning to do the strangling (putting pressure on financial stability).

France’s 10-year borrowing cost climbed to more than 1.5 percentage points over Germany’s today. That’s the second largest economy in the euro zone paying 150 basis points more to borrow than the largest economy in the euro zone.

It’s the widest risk premium to own French government debt since 2012, and that was the height of the European debt crisis. It was default watch. It was the brink of collapse of the European Monetary Union.

Moody’s reviews France’s credit rating on Friday. The French parliament votes on the budget next Tuesday. The ECB meets two days later.

Let’s talk about Q3 earnings …

As we get into big tech earnings this week, the market positioning looks a lot like July (early Q2 earnings season).

Going into Q2 earnings, the market sold the AI names, trying to get a head start on a disappointment. Palantir was down 29% on the year going into its Q2 report. Then, the numbers. Revenue grew 93%, profit tripled, and the company raised its outlook.

The negative surprise never came.

Fast forward a few months, and tonight, SpaceX kicked off Q3 big tech earnings. SpaceX gives us a look into both the data center and AI frontier model business.

The numbers: Overall revenue was $14.6 billion, up 161% from a year ago and well above estimates. And the AI business brought in $7.6 billion in the quarter, up 195% from the prior quarter, and up 830% from same period a year ago.

The AI business is now bigger than Starlink.

Tomorrow, we hear from Meta and Tesla. The market is positioned for disappointment again. Remember, in Q2, the selling was about the market position (long, but skittish). The numbers were about the state of the business (very strong).

For much of this year, we’ve been talking about Europe’s doom loop.

Let’s talk about how it’s playing out.

This “doom loop” is the self-reinforcing loop that, given a catalyst, begins an acceleration toward another sovereign debt crisis in Europe.

And there hasn’t just been ‘a’ catalyst. There has been a flurry.

From tariffs, to a defense crisis, to an energy shock.

The latter has exposed Europe’s energy dependence. That has resulted in soaring energy prices, which raises inflation. Inflation forces higher interest rates. Higher rates mean a higher cost of government borrowing. Rising borrowing costs weaken the economy, which makes servicing bloated government debt in the weak spots of Europe more difficult. And that results in higher borrowing costs.

That spiral is underway.  

What stops it? 

In 2012, it was the big and bold threat by Mario Draghi (then President of the European Central Bank) to be an unlimited buyer of European sovereign debt. The threat alone was enough to stabilize the bond markets, stop the loop, without even buying a single bond.

But times are different.

The ECB still wields the threat. The question is, will they be challenged by the market to follow through on the threat? If so, it’s unlikely that they will have the firepower to back it up.

Why? Because they will need the support of the Fed, at the very least, to ensure European banks have ample access to U.S. dollars (which they will need in times of stress).

But as we’ve discussed over the past seven months, this is where the Warsh-led Fed (and Trump’s Treasury) can apply conditions to get that support — policy and alignment conditions that European leaders have been unwilling to agree to, to this point.

Trump has restored American leadership in the world. He has used the leverage of the American consumer to reset global trade, and he has reversed the anti-growth climate agenda in favor of energy abundance.

Europe’s leaders have resisted. They went all-in on a climate and social agenda over the past decade, and they haven’t been willing to abandon it.

The price of that resistance is the doom loop.

So, Europe now pays more than nine times what America pays for natural gas. And the bond market has been pricing it. France now pays nearly 1.5 percentage points more than Germany to borrow, close to the widest gap since Europe’s debt crisis in 2011 and 2012. Italy’s borrowing costs are climbing with it.

And now it’s showing up on the ground.

On Saturday, more than half a million people marched across France over the cost of living and failing public services. Tonight, parts of Paris are under curfew.

France is being squeezed.

Meeting demands for more public services costs money. That means more debt, which drives borrowing costs even higher. Cutting spending to stabilize the debt means more unrest.

With all of this, on Friday, Moody’s reviews France’s credit rating. It has already warned it may cut it. A downgrade would make France’s borrowing more expensive still (accelerating the doom loop).

As we discussed in July, the end game of the doom loop is political change.  And political change is probably the only way alignment happens.

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.