The AI bubble threatens to burst: Is your pension in danger?
Massive investments in artificial intelligence are shifting to debt-based financing in the private credit market, and analysts warn that the risk could indirectly seep into household savings portfolios.
The artificial intelligence market has entered a new phase, where the central question is no longer just how much money technology companies are willing to invest, but whether the massive investments in AI infrastructure will succeed in generating a return that justifies their scale. Simultaneously, the industry's financing model is changing, as institutional investment bodies and the private credit market play an increasing role in financing data centers, chips, and energy infrastructure.
Sylvia Jablonski, Chief Investment Officer at Defiance, assesses that the AI cycle is still strong, but warns against a situation where financial leverage grows faster than the return generated by the real economy. According to her, collaborations between Nvidia and large investment bodies could open a significant source of capital that will allow for accelerating investments in data centers, electricity, cooling, networks, memory, and chips.
"The demand for computing capacity is real, and therefore I do not call it a bubble today," says Jablonski. However, she emphasizes that investors need to examine utilization rates and return on invested capital more closely, because these will be the metrics that determine whether it is an infrastructure boom or a bubble.
(Sylvia Jablonski, photo: Defiance)
On the other hand, Sandeep Rao, a research analyst at Leverage Shares, presents a more cautious approach. According to him, Nvidia's agreements with investment and credit bodies such as Apollo, Blackstone, BlackRock, and KKR are changing the financing structure of computing infrastructure. The ability to turn GPU clusters into assets that can be financed through debt allows for shifting some of the capital expenditures from the balance sheets of technology companies to credit facilities.
Rao warns that if the monetization of AI software and the return on investment of the companies do not keep pace with what is required to service the debt, losses could be created in the private credit market and subsequently in the stock markets as well. According to him, the exposure is not limited to technology companies alone, because investment bodies manage pension and savings funds, and therefore some of the risk may indirectly seep into the savings portfolios of households in the United States and Europe.
The gap between the two illustrates the big question currently occupying investors. On one hand, the financial system may find a more efficient way to channel capital into the AI revolution. On the other hand, the expansion of debt usage could increase the risk in case returns do not meet expectations.
Simultaneously, macro markets are also signaling a change. Paul Marino, Chief Revenue Officer at Themes ETFs, points to the strengthening of gold alongside the weakening of the dollar. According to him, gold reached about $4,375 per ounce after a rise of about 7.8% in the last month. At the same time, gold purchases by central banks in the second quarter totaled about 289 tons, an increase of 62% compared to the same period.
Marino believes this is a structural change in the role of gold, which is becoming not only a tool for hedging against inflation but also a reserve asset that is not dependent on the dollar. Simultaneously, the DXY dollar index fell to about 99.6, against the backdrop of moderating inflationary pressures and weaker retail sales data.
(Paul Marino, photo: Themes ETF's)
Uncertainty also continues in the foreign exchange market. The Japanese yen strengthened after intervention by the authorities, but subsequently lost a significant part of the correction and returned to trading above 159 yen to the dollar. Marino estimates that without a significant change in the interest rate differentials between the United States and Japan, the dollar against the yen may continue to move in the range between the mid-150s and 160 yen to the dollar.
Simultaneously, investors are expected to focus in the coming week on macro data in the United States, primarily the minutes of the Federal Reserve meeting from July. Data on manufacturing, the housing market, housing starts, building permits, industrial production, and retail sales are expected to provide a broader picture of the state of the American economy.
The earnings season will also continue to affect the markets. The reports of Home Depot, Target, and Walmart may provide an indication of the state of the American consumer, while the reports of Palo Alto Networks are expected to shed light on organizational demand in the cyber sector.
Ultimately, investors are facing a complex combination of opportunities and risks. The investment cycle in AI is still generating huge amounts of capital, but the transition to debt-based financing raises the question of who bears the risk and what will happen if the return on investments does not keep up with the pace of capital inflow. Simultaneously, gold, the dollar, and the yen continue to reflect the uncertainty surrounding interest rates, inflation, and monetary policy. The central question in the second half of the year will be whether the economy will succeed in justifying the high expectations, or whether the increasing leverage will begin to expose the weak points of the AI cycle.
