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… 

Tomorrow morning we get the June inflation report.

Expectations are for a decline for the month, mostly on the sharp reversal in gas prices. That would bring the year-over-year rate back down below 4%. 

Core inflation, which excludes food and energy, is expected to rise two-tenths, with the annual rate around 2.8%.

That said, the main event will come after the inflation report tomorrow morning, when the new Fed Chair delivers his first testimony to Congress.

Since Warsh chaired his first Fed meeting last month, the “Fed speak” has been notably quiet.

Under the old Fed, a policy meeting was followed by a parade of Fed governors and regional presidents, out in force, trying to steer the market to align with their view. 

This time, almost nothing.

The public appearances have been about bank regulation, AI, and ceremony. Not the path of policy. And, as we’ve discussed, that silence is consistent with what Warsh told us his Fed would be.

Less telegraphing. Less message management. More independent thinking. More dissent.

That brings us to Waller’s speech today. 

Remember, Chris Waller was a top candidate for Fed Chair. His speech today was titled “Monetary Policy at a Crossroads.”

He said tomorrow’s CPI report and Wednesday’s PPI report will help him determine the appropriate path for policy.

If core inflation cools, he wants to see “several months” of it before concluding the trend has changed. If it comes in hot, the Fed should consider tightening “in the near term.”

So, Waller gave the market a reaction function.

Cool number, keep holding. Hot number, think about hiking. Several good months, maybe the direction changes. This is akin to the Powell-led Fed telling us if the “labor market cracks” they’ll cut. 

That’s the old Fed.

It’s forward guidance involving the “conditions” for action.

Instead of telling us what the Fed will do, it tells us which outcomes will make the Fed do something. Either way, the market worries more about trading the Fed, and what they’ll do, rather than positioning for what the economy is doing. 

Now, remember what Warsh did at his first meeting. It tells us today’s Waller speech was just one vote, not the voice of the institution. 

Warsh let his colleagues submit their rate forecasts last month, the famous dots. He declined to submit one himself.  

He let them show their work, then pointed out they had done it in pencil, with big erasers (i.e. they don’t fully believe their own forecasts).

And in that first meeting (and post-meeting press conference) he then put the full machinery that produces those forecasts under formal review.

With that, last week, in advance of Warsh’s first Congressional testimony as Fed Chair (tomorrow and Wednesday), the Fed announced the leadership and objectives of the five task forces — and then released a 77-page semiannual report on the state of the economy, within which Warsh’s Fed criticized the timeliness of the data the Fed depends on.

Which brings us back to tomorrow’s number.

An inflation print driven by an oil shock is not the same as one driven by an explosion in money supply (the 2020-2021 analogue the media and some Fed members are anchoring to). 

The old Fed waits for the number. The Warsh-led Fed should ask what produced it.

Yesterday, we talked about the building burdens Europe is absorbing, to maintain access to safety (U.S. security guarantees), stability (the dollar and U.S. capital markets), and markets (the U.S. consumer).

This is the “political alignment” by consequence, we’ve talked about. 

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 that, let’s revisit an excerpt from my April 27 note …

With a liquidity crisis coming down the pike in Europe (accelerated by the energy shock), this time without the backstop of the world’s most powerful central bank (the Fed), the Brussels political class has only two paths.

Path 1) They can align with Washington, which would mean admitting that their policies — open borders, climate agenda, deindustrialization, energy dependence, dismantled defense capacity — destroyed Europe’s competitiveness.

If they do that, they relinquish their power grip, and likely end their political careers.

Path 2) They accept Chinese liquidity and solvency support in exchange for becoming the next debtor consumer market for Beijing.

Trump’s strategy has seemingly been to squeeze them economically and financially (by the vulnerabilities of their own design) until the costs of the current leadership become unbearable … and the people of Europe deliver their own change of leadership.

With that in mind, “change” seems to be underway. 

Britain’s Prime Minister resigned two weeks ago, with defense under-funding among the triggers.

Germany’s Chancellor just broke his own party’s decades-old balanced-budget religion to fund rearmament.

And now the second-largest economy in the euro area is headed toward a 2027 election with a nationalist (Marine Le Pen) potentially at the front of the field.

One by one, the personnel of the old regime are exiting or converting.

This morning’s Financial Times front page laid it out in one frame: the Le Pen ruling, NATO countries unveiling billions in defense deals “to mollify Trump” (their words), and a feature asking how Europe would fight without America.

Political regime change isn’t a risk to Europe’s realignment. It’s probably the only way alignment happens.

Meanwhile, we have more meetings in Europe on the agenda this week — to discuss how they will fund trillions of euros of defense, AI infrastructure and energy spending, without exposing solvency and liquidity vulnerabilities in the weaker constituent countries of the euro zone.

The market question is not whether Europe can discuss, plan and announce the spending, it’s whether they can fund it.

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…

In my last note, we talked about Warsh’s debut on the international stage, at the ECB Forum in Portugal, and the placating tone from Europe’s central bankers. “My friend Kevin,” as Lagarde put it.

That was the public posture.

Today, the Wall Street Journal gave us the private one. The front page carried the rupture with America: European leaders, behind closed doors, venting about Trump, tariffs, Greenland and the breakdown of the old alliance.

Some in the room reportedly called it “therapy night.”

Now let’s look at the behavior.

Last week, Europe met Trump’s July 4 trade deadline three days early.

The Turnberry Agreement (the U.S./Europe tariff agreement from last year) finally entered into force July 1. The terms: Europe accepted the 15% U.S. tariff cap on most European goods, and cut tariffs on U.S. industrial goods to zero.

For context, that bill had been frozen for the better part of a year. Once Trump put it on the clock, with a July 4 deadline, surprisingly the European bureaucratic machine got it done.

But the day after Europe complied, Trump attached the next condition: a 100% tariff on any country imposing a digital services tax on American technology companies, superseding any trade deal “whether implemented, signed, or not.”

Remember what this is all about: tariffs are about restructuring global trade and realigning the world (away from China, back toward the U.S.).

Europe has been a hold out, if not moving in the opposite direction.

With that, Trump is forcing compliance by using the U.S. position of strength.

He used access to the U.S. consumer as leverage to get the trade deal done with Europe. 

And for decades, Europe’s security rested on the U.S. balance sheet. America provided the backstop, and under that umbrella Europe built the welfare state, the regulatory state, the green transition and the euro project.

Now Trump has made that umbrella conditional.

And when the security guarantee becomes conditional, the bill moves onto European government balance sheets.

That happened today.

The Financial Times reported that Germany plans to borrow more than 800 billion euros by 2030, mainly for defense. 

This is big. This is Germany breaking its fiscal religion, because it has to.  As Germany’s finance minister said: “We can’t defend ourselves against Putin with the Schwarze Null.”

The question isn’t whether Germany can finance rearmament. The question is what happens when the whole continent has to contribute to this new security regime. These countries enter this regime with high debt, low growth, and fragile politics.

Let’s talk about yesterday’s central bank event in Europe.

On Wednesday, Kevin Warsh made his first international appearance as Fed Chair, on a panel at the ECB Forum alongside the heads of the ECB, the Bank of England, and the Bank of Canada.

The placating from his counterparts was unmistakable.

Lagarde volunteered Warsh’s policy philosophy as her own (highly agreeable with “my friend Kevin”).

On forward guidance — the “policy tool” of telling the market what you want it to do, and then making policy decisions based on what the market is doing — they all followed Warsh’s lead. And under the Warsh-led Fed, it’s over (no more forward guidance).  

No push back from anyone on stage.

Why such warmth and verbal alignment?

Remember, every one of Warsh’s counterparts on that stage runs a system that, in a crisis, needs access to dollars. Warsh holds the keys.

And no one needs those keys more than Europe.

Also remember, at this same forum a year ago, the conversation turned into a public airing of Europe’s core problem: it cannot fund its own fiscal ambitions. The sovereign debt and banking flaws exposed in the global financial crisis were never fixed, only papered over by the ECB. And the ECB could “paper over”/backstop the wobbling sovereign debt in the weak spots of Europe only to the extent that the Fed stood behind it, in coordination, with unlimited dollars accessible.

That coordination is what’s now in question.

Warsh has the Fed’s entire framework under review. He told the audience at this ECB forum that the Fed’s balance sheet “borders on fiscal policy” and needs to come “down to size.” A Fed stepping back from financing government debt is a Fed rethinking the whole backstop business.

So, for the central bankers of Europe, Britain, and Canada, when your ability to weather a storm depends on the world’s most powerful central bank, you tend to ingratiate yourself to the man that runs it. 

Stocks were bid again today, for a second straight session. The AI infrastructure names led the way: the chip and data-center stocks that sold off hard over the past two weeks are clawing it back.

Remember, last week some of the biggest winners in the AI trade were giving back gains ahead of Micron’s earnings. And as we discussed, instead of a signal that demand was cracking, it looked more like a positioning event (shaking out the unconvicted, late-to-the-party longs). Fast forward a week.  Micron earnings were a blowout. And the AI buildout trade remains intact.

Let’s talk about the yen.

The yen broke down today to the weakest level against the dollar since 1986. A forty-year low.

What does it mean? 

The official story on the weak yen has been Japan and the United States “coordinating closely” on the currency. Japan’s Finance Minister Satsuki Katayama and U.S. Treasury Secretary Bessent have been “talking.” They agree on “bold” and “decisive” action against disorderly currency moves.

And Japan actually intervened back in the spring, to prop up the yen. 

But the yen is weaker today than it was when Japan intervened. No action — even on the forty-year low.

So at this point, what they are enabling (both the U.S. and Japan) is a yen that keeps falling, in an orderly way. 

That begs the question: Is it about orderly decline, rather than stopping the decline?

For Japan, a weak yen is the only realistic way to manage the largest debt load in the developed world, north of 250% of GDP. Inflate it away. A cheap currency lifts exporters, lifts nominal growth, and erodes the real value of the debt over time.

For Washington, a stable, allied Japan with a cheap currency could serve as the manufacturing-and-technology offramp to soften the blow from a decoupling from China. If we think about the comments around last week talks between Bessent and Katayama, they were said to also touch on critical minerals, semiconductors, and keeping advanced AI out of the wrong hands.

So, coordination? Yes. To defend the yen? Unclear.  

What does it matter to us?

This is the funding engine of global risk-taking, running again. Cheap yen, borrowed and deployed into higher-returning assets around the world.

If the carry trade is rebuilding, global liquidity is flowing.

And in the last cycle, this kind of liquidity poured into crypto. Bitcoin was the high-beta expression of easy global money. This time, the funding engine is running and Bitcoin is going the other way, down roughly a third on the year.

So where does the carry money go now?

Into the real economy. Into chips, data centers, the power build-out, the physical layer of the AI boom. The speculative liquidity that used to chase digital assets is now financing real assets — infrastructure you can stand next to. It’s the same funding engine/ same liquidity machine, but different destination.

Which brings us to tomorrow.

Tomorrow morning, Kevin Warsh appears on a panel at the ECB Forum alongside Christine Lagarde (ECB), Andrew Bailey (BOE), and Tiff Macklem (BOC). The Fed’s role in global liquidity is likely to change under Warsh. His central bank counterparts have been bracing for a world where the implicit Fed backstop is no longer a guarantee.

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AI and chip stocks bounced back hard today, recovering some losses of the past two weeks.

The catalyst was news that SpaceX will be fast-tracked into the Nasdaq 100.

It’s a short trading week, with markets closed Friday for the Independence Day holiday. With that, the jobs report has been pulled forward to Thursday.

But the biggest event of the week may not be chips, SpaceX, or jobs. It may come from a stage in Portugal at the annual ECB Forum. Kevin Warsh (new Fed Chair) will appear Wednesday alongside his central banking counterparts from Europe, the UK, and Canada.

Remember, the last time we heard from Warsh, he had just chaired his first FOMC meeting and put the Fed’s entire policy framework under review. Everything is on the table, except the 2% inflation target (for now).

As we’ve discussed for the better part of the past year, since Trump first began turning up the heat on Jerome Powell (threatening to fire him), a new Trump-aligned Fed Chair was always likely to mean more than just a different approach to interest rates. It will likely mean the end of the Fed’s role as central banker to the world, the implicit global backstop that has stood behind the international financial system, particularly through dollar swap lines, for the better part of the last two decades.

And no region is more exposed to that regime change than Europe.

And with that, this week that exposure gets put on a stage in front of the world, at the ECB Forum.

A year ago, we talked about the outcome of the 2025 forum.

Markets were focused, at that time, on what Jerome Powell might signal about rate cuts.

But a more important topic emerged at that forum.

It was the solvency of Europe.

As Europe was faced (and still is) with large-scale fiscal expansion to fund defense, innovation (AI) and energy — the ECB Forum became a public airing of Europe’s inability to fund itself.

As we discussed last July, Europe’s large-scale fiscal spending plan can only work if the ECB monetizes the debt — backstopping the sovereign bond markets, particularly in fiscally weaker member states. But the ECB backstop only works when major global central banks are coordinating (namely the Fed). And under Warsh, the era of coordinated global monetary policy may be over.

With that, ECB President Christine Lagarde opened this year’s ECB Forum today, with a speech defending Europe’s resilience and the strength of its own policy toolkit. It was a speech clearly designed to project confidence to markets. But that confidence in its “tools” rests on the assumption that the ECB can maintain stability in the sovereign bond markets, as they have for the better part of the past fifteen years. 

And on Wednesday, Lagarde will share a stage with the man that may reshape the very backstop that her institution has relied on for fifteen years.

Back in early May, we walked through the playbook (then) Fed Governor Stephen Miran laid out on how Kevin Warsh can shrink the balance sheet without creating a liquidity shock.

Remember, the Jerome Powell-led Fed stopped and reversed on the balance sheet back in December.

And Powell said this in the post-meeeting press conference: “There’s a secular ongoing growth of the balance sheet. We have to keep reserves, call it, constant as it relates to the banking system or to the whole economy. And that alone calls for us to increase about $20 [or] $25 billion per month.“

So he said this new balance sheet expansion would be “ongoing,” meaning indefinite. 

If “ongoing” is indeed required to “keep reserves constant,” just to maintain stability in the funding markets, then how does Kevin Warsh step in and carry out his plan to shrink the balance sheet?

That was the point of that Miran speech last month.

He said the roughly three trillion dollars banks hold in reserves, which the Fed is afraid might become “scarce,” is not a reflection of what banks would choose to hold in a normal market. It’s a reflection of what they’re made to hold, in the post-Global Financial Crisis regulatory regime.

So, the top of Miran’s list of paths forward was to ease the GFC-induced over-regulation — ease the liquidity coverage ratio and the internal liquidity stress standards. 

Ease those rules, and the reserves can come down. Then Warsh can shrink the balance sheet without breaking funding markets. 

And then the capital that has been trapped in the banking system gets freed. 

And that capital gets freed in the form of pro-economic things like, loans to consumers and businesses. 

With all of this in mind, the results of the Fed’s annual bank stress test were released today. And they are “well positioned to weather a severe recession.”  The banks got an all-clear with room to spare.

And that all-clear signal was met, almost immediately, with announcement from major banks of dividend increases. Capital freed from the regulatory noose, and a wall of cash payouts starts.

This, on the same afternoon as the stress test results, should signal the regulatory regime is loosening, and credit growth is coming. 

And this comes on the same afternoon that Micron answered the questions about the durability of AI demand, unequivocally.

Revenue of $41 billion against $9 billion a year ago (not a typo).

Gross margins up 10 percentage points to 85%. 

Earnings per share more than doubling from last quarter.

Next-quarter revenue guidance of $50 billion, well above the Street. 

So two of the market’s standing fears were tested on the same day. One, the fear AI demand is rolling over. The other, a decade old, the fear that banks are permanently capital-constrained utilities.

Both were answered clearly within hours of each other.