Brian has handed over the Friday Note this week as he's over in Ireland, and I'm going to start with something that sounds obvious but may not be...
If a company reports extraordinary sales and profits, surely that proves the demand for what it sells is extraordinary?
Normally, yes, but the AI boom is producing some financing arrangements which make that question more compelling. To explain, I thought a simple example might help.
Imagine I manufacture £100,000 cars and, because I want to sell more of them, I help you borrow the £100,000 needed to buy one. You get the car, I get the money and my accounts show a perfectly genuine £100,000 sale. Anyone looking at my results might reasonably conclude that demand for my cars is booming.
But there is one very important question:
Would you have bought the car if I hadn't helped provide the money to do it?
Scale that example up by a few hundred billion dollars and you start to understand one of the concerns surrounding AI. Some of the giant tech companies are helping finance other AI businesses. Those AI businesses then use that money to buy from the very same tech companies. The supplier then reports booming sales, investors see those booming sales and become more confident that AI demand is enormous.
As a result, valuations rise and those higher valuations make it easier to raise even more money.
Around we go.
The Bank of England put an official name to this in July: “circular financing arrangements”. It warned of self-reinforcing loops where technology companies help finance businesses which then buy their products.
This week gave us another taste of just how enormous the sums are as Nvidia agreed to provide up to $105 billion of guarantees supporting OpenAI's lease of a huge new data centre in Ohio. And guess whose chips will sit at the heart of it?
To be clear, there is nothing automatically improper about this. Manufacturers helping customers finance purchases is hardly new. Car makers do it, as well as aircraft manufacturers, and industrial companies have done it for decades.
No one is seriously questioning whether there is real demand for AI, but the important issue for investors is where genuine end-demand finishes and finance-assisted demand begins.
Also, the sheer amount being spent when you compare it to many of these companies’ profits is somewhat alarming. OpenAI generated roughly $13 billion in revenue in 2025, yet they’ve been public about their infrastructure commitments reaching as much as $1.4 trillion over the next eight years or so. Such ambition only makes sense if revenues grow dramatically and continues to do so for years to come. That leaves little room for disappointment.
Away from AI, this week the yield on the 30-year US Treasury rose above 5.3% for the first time since 2007.
In plain English, investors are demanding a much bigger return for lending governments money for a long time (and not just in America).
Why? Inflation is part of the answer, but not all of it. Huge government debt means an ever-growing supply of bonds, and these bonds need buyers, but some of the traditional buyers are drifting away.
This matters well beyond the bond market. They make mortgage rates harder to bring down, increase borrowing costs for businesses and governments, and offer investors a more attractive alternative to buying equities. For highly valued stock markets in particular, a world where relatively safe assets offer 5% or more is rather different from the ultra-low-rate world in which many of today's stock-market valuations were built.
When the cost of long-term money is rising across the US, UK and Japan at the same time, it is worth paying attention... And on Wednesday, Washington showed it was doing just that.
Treasury Secretary Scott Bessent doubled the amount of long-dated Treasuries the government can buy back, which pushes yields down by adding a big buyer. The sums involved are tiny compared with the enormous US bond market, but the signal was more interesting than the actual dollars involved.
Bessent was telling the world he’d seen yields rising and wasn’t happy about it, but the bond market’s reply was essentially a collective shrug. Buying back a few more bonds might ease the pressure for a day or two, but it does nothing to tackle the underlying problem of rising US debt and a huge budget deficit. It’s like taking a painkiller for a broken leg.
And yet, through all of this, markets once again remained relatively calm over the week.
Wall Street’s so called “fear index”, the VIX, fell to its lowest level of the year, while Bank of America’s latest survey of fund managers shows cash levels down to just 3.5%, equity allocations around a five-year high, and a majority expecting the global economy simply to keep growing without a meaningful slowdown. Professional investors certainly aren't hiding under their desks.
At the very same time however, corporate insiders (companies’ own executives and directors), those who know their own business better than anyone, are more bearish than they have been in decades. An interesting contrast…
(Normal service resumes next week as Brian is back)