Jittery Stock Markets Leery of AI & Private Debt Market Blowup

U.S. stock investors have been jittery in recent days due to new warnings about a possible bubble burst relating to AI and also private credit markets.

Swiss bank UBS recently published its worst-case scenario for defaults in the private credit sector, estimating that default rates could surge to 15 percent if AI triggers an “aggressive” disruption among corporate borrowers.

For background, private credit firms are primarily non-bank lenders, such as private equity, asset managers, and other specialty funds. These institutions lend money directly to companies, providing alternative funding options for companies and individuals.

When an economy becomes overleveraged, there is generally some spark that triggers a meltdown. In the late 1990s, it was the dot-com bubble. In 2008, it was the real estate bubble. Today, we have an AI bubble.

Some might question whether the AI sector constitutes a bubble. While it is debatable, there are some clear parallels to the dot-com era in the mid to late 1990s. At the time, billions of dollars flowed into internet startups just because they were internet startups. This was exacerbated by artificially low interest rates that incentivized risky borrowing. That bubble eventually popped. It was inevitable, because when you borrow billions without a viable business plan, you're likely to get into trouble.

We're seeing a similar mania in AI today. According to an MIT study, U.S. businesses have invested between $35 and $40 billion into AI projects, with 95 percent failing to generate any measurable return on investment.

UBS characterized “AI disruption” as a “clearer catalyst” for a credit meltdown.

And private lenders have significant exposure to potential problems in the AI sector.

The private credit market makes up a small percentage of lending, but there is always the risk of contagion, as we saw during the 2008 financial crisis. And there are massive levels of debt.

The upshot of all of this is there seems to be big trouble brewing and this will almost certainly lead to more volatility in markets, more uncertainty, and also likely -- more Fed rate cuts.

Well before we get to this week’s interview let’s take a look at the trading action for the week in the metals.

Gold is up now about a little more than $100 or 2.2% to check in at $5,240 an ounce. Silver is soaring here late in the week and is up nearly $9 now or 10.4% since last Friday’s close to trade at $94.16 an ounce as of this Friday late morning recording.

As for the PGMs, platinum is experiencing similar success as silver. The industrial metal is up a little more than $200 or 9.3% on the week to trade at $2,371 an ounce. And finally, palladium is up a more modest 1.8% to trade at $1,794.

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