These are tense days for capital markets with warnings from the Bank of England and International Monetary Fund over inflated artificial intelligence valuations.
As much as $1.5trillion has poured into AI technology worldwide this year. Doubtless there is exuberance, but the trigger for financial crashes is rarely predicted by watchdogs.
Almost all supervisors were absent without leave before the great financial crisis of 2008.
Yet the smartest of hedge funds already had spotted the fissures in the securities built on American sub-prime mortgages.
It was only after Liz Truss’s mini-Budget rocked UK bond markets that we learnt about liability-driven investments, the dangerous derivative product built on gilt-edged stock, which almost caused a cascade of banking failures and endangered the pensions of millions of ordinary people.
Nobody expected that the failure of Greensill, a newcomer to the factoring market, would prove a key factor in the collapse of Credit Suisse in March 2023.
Warning signs: As much as $1.5 trillion has poured into AI tech worldwide this year sparking fears the bubble could burst
It is the black swans that can prove the biggest threat to financial stability, confidence and equity values.
I have no doubt some of the toppy deals done by Nvidia will go horribly wrong. It is impossible to keep up with the dizzying number of multi-billion transactions by boss Jensen Huang.
But with projected sales of $50billion in 2025, Nvidia’s $100billion transaction with ChatGPT owner OpenAI, and the deal it has done with semiconductor firm AMD come from a reasonable income base.
Less remarked upon is the rise of the $3tn private credit market. Unlike bank lending, these markets are opaque and fall outside the regulatory safety net erected after the great financial crisis. The collapse of First Brands provides a case in point.
The ripples from the failure of the car components group, with $10billion of liabilities, spread far and wide.
Switzerland’s last significant bank UBS is exposed via investment funds to $500m of First Brands debt.
Investment bank Jefferies has revealed that its Leucadia Asset Management Fund has $715million of exposure in the shape of receivables. The company’s biggest creditors allege $2.3billion funds have simply disappeared.
Ripples from the failure of another private credit vehicle, sub-prime car credit supplier Tricolor Holdings, have raised fears of broader stress in the Wild West of lending.
Efforts by regulators to get a handle on unregulated finance have proved slow and difficult. The consequences of a failure to act could be immeasurable.
Chinese whispers
The timing of HSBC’s £11billion decision to buy out the minority interest in Hang Seng Bank is a bit of a mystery.
HSBC has for 60 years held an interest in the Hong Kong bank, which offers banking services to local Chinese speaking customers.
There is no reason to think there will be much pushback from minority holders, with Hang Seng’s share price up 30.3 per cent on Wednesday’s close.
But dissident shareholders can become greedy. HSBC has made no secret of its tilt to its home base of Hong Kong and China, as it has pulled out of much of Europe, except for ring fenced operations in Britain, and dialled down activity in the US.
Shareholders in HSBC will have concerns. The bank intends to finance the deal out of income, which means a suspension of share buybacks.
The other fear will be that HSBC wants to limit the damage caused by Hang Seng’s adventurous property lending with bad loans making up 6.7 per cent of gross loans this year, more than double the figure in 2023.
It is not a bailout, insists chief executive Georges Elhedery, but part of a streamlining of operations.
That’s one way of putting it.
Silver lining
Gold may glister but silver, which is both a decorative and an industrial metal, is positively gleaming.
At $51 an ounce the price has rocketed 70 per cent this year, its biggest jump since 2010.
Demand is coming from investors seeking an alternative safe haven to bullion. Silver’s use in electric connectivity and electric vehicles is expected to keep the price bubbling.
Time to bring Grandma’s tarnished tea set down from the attic for scrap.
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