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Upon returning from vacation we made a summary of some threats that had been brewing unnoticed during the summer and that were going to mark the quarter. Inflation and debt have risen in line with expectations. Investors have begun to express their distrust in technology valuations and conflicts have entered no man's land, with constant rumors of an escalation that does not start. The super electoral cycle is in full swing, but its effects will not be immediate. By parts:
🆙 Inflation
In Spain it has touched 5% in September and October, despite the package deployed by the Executive that has contained the real rise. In Italy it stands at 5.4% and in the euro zone at 4%. There is still no definitive data for October for the United States, but the increases in fuel prices in September anticipate what pockets and deposits are already feeling; That month alone, fuel prices rose 34.2% in the US. Added to this is the fact that gas in the EU rose 12% in October, which can be transferred to electricity for the rest of the quarter.
The Bank of Spain predicts that inflation will become entrenched and drag on until 2027. The IMF is more cautious and highlights the resilience of large economies in the face of these energy costs. Although prices have not skyrocketed to 2022 levels, the spikes are significant for exhausted consumers. Given that energy costs take six months to impact the rest of the economy, the acid test will come at the beginning of next year.
🪙 Public debt
As a consequence of the general rise in inflation, central banks have begun – slowly, of course – to raise interest rates, using the classic formula to contain prices (which works very well when inflation is because the economy is overheated and there is a lot of demand, but which has no effect when the problem is one of supply, that is, there is less energy and the price rises). As money is worth more, investors demand a higher return for lending money to companies and governments, and states with large public debts such as France or the United States increasingly pay more for bonds in the market. This causes the ball of debt to grow very quickly and has rapidly deteriorated the situation in France, precipitating political instability in the country and then in the region. In addition, Japan, which has been a lender for decades, has begun to repatriate investment thanks to the fact that its money is also more profitable, draining liquidity from many Western governments.
The Alpine Macro analysis house says that the situation in France has not found a footing. "For investor confidence to change [...] it would require one of two things, which are not on the table at the moment. First, that the current French government in office, or the main candidates in next year's presidential elections, gave credible signals of fiscal consolidation policies. Neither of them can do it, since the current French legislature is in a deadlock and, in general, maintains a lax fiscal stance, while any French presidential candidate who opts for fiscal austerity would be condemned to Secondly, an intervention by the ECB or the EU would be necessary, in case the French crisis worsens or spreads." The firm places this possible rescue scenario for the beginning of spring, just before the May elections.
🫧 Private debt
As the level of the tide rises - which marks the interest rates set by central banks - the level for credit in general rises, and the Euribor closed October at 3.2%, making mortgages more expensive and putting a strain on family budgets. But, be careful, in the United States the average 30-year mortgage rate has gone from the 2021 lows of 3% to levels above 7%. Although Spain is only affected by the increase in the price of gasoline, the mortgaged middle classes are paying an average of $1,000 more per month in just five years. The housing access crisis in the US is even more brutal than in Spain because one of the expenses that citizens have to cut is health insurance to be able to cover the rent or mortgage. The famous crisis of the middle class or the working class has turned the mid-term elections upside down, but there are still two years ahead of Trumpist volatility so that uncertainty continues to creep into prices.
Despite the social crisis, household debt is not yet among the top risks to monitor, because debt levels have not reached those of the 2008 bubble. Large technology companies and other infrastructure firms that are developing the shell necessary to deploy Artificial Intelligence are highly indebted. The markets have been wondering for weeks whether all this capital, borrowed at increasingly higher prices, will have the expected return. That is, if this AI story is profitable. The big technology companies, Amazon, Microsoft and Alphabet, Google's parent company, are not of concern due to their ability to assimilate the debt. But players in the second division may have problems returning what they borrow.
A recent report from the Basel Bank for International Settlements (led by Spaniard Pablo Hernández de Cos) warns that investment in artificial intelligence infrastructure is increasingly financed through long-term debt and complex off-balance sheet agreements. This concentrates exposure on a handful of large companies and may compromise global financial stability.
Doubts about the profitability of AI led to falls in the stock market in October, which time will tell if they remain just a correction in stock market values or something more. The publication of the annual results between the end of January and February will provide figures that justify this stipend or not.
🪖 Wars
The war in Ukraine was marked in the quarter by alleged technical failures in Starlink satellites that put kyiv's defense systems in trouble. However, Ukraine has continued to advance in the use of its own ballistic missiles that have allowed it to carry out long-range operations and increasingly penetrate Russia, in addition to being precise in the destruction of strategic objectives such as refineries.
The United States announced that it was lifting sanctions on Russia, which has had two effects: it has slightly stabilized oil and fuel prices and has given some oxygen to Moscow, which is having increasing problems finding income with which to finance the war. But the impact has been very limited because the political measure has not put new barrels of crude oil into circulation and those that appear will quickly be used for developed countries to fill their reserves again.
what's going to happen
Spinning with the last point of the wars. For days, rumors have been published that once the legislative elections are held in the United States, a new offensive against Iran, sponsored by Israel, would be unleashed. Trump and Netanyahu have lost control of the chambers and are battered internally. But that will precisely lead them to turn even more intensely abroad, since in foreign policy they have the room for maneuver that they do not have at home. Whether this possible attack is carried out or not, the forecast is to see a lot of activity from Donald Trump abroad, where he will set the agenda and be entertained by the limited margin to act at home.
Control of the Chambers by the Democrats also anticipates that investment in AI could be curbed, at least in terms of the deployment of data centers. These infrastructures became one of the main hot spots of the campaign, with growing discontent among citizens. Most experts believe that it will be one of the first consequences of the change of color in Congress. This may also mean that it will puncture the country's growth, which right now is supported by these investments. Oxford Economics believes that without investment in AI, US growth would not have exceeded 1.4% annualized in the first half of 2026, compared to the final 2.2%. “The US economy depends much more on this technological boom for its growth than in the previous boom of the late 1990s,” they say in a recent report.
Lower growth and lower investment in infrastructure may compromise some of the planned projects and add even more uncertainty to the sustainability of technology debt.
The quarter will culminate with two more milestones. The elections in Spain that can be read as a prelude to what will happen in France in spring; and the election of a new president for the European Central Bank, once Christine Lagarde has announced her resignation. And then, winter will come.
The quote: 3%
Investment in Artificial Intelligence could reach 3% of GDP in 2027, equaling the figure that was allocated to the deployment of the railway in 1887. And that is a warning. Because the train never managed to reach profitability expectations and left behind a trail of bankruptcies.
The phrase
“We don't know what happens to us, and that is what happens to us,” said Nicolás Sartorius at the closing of the May 1 Foundation Congress on the transformation of capitalism.
