Extract from ABC News
Analysis
US national debt has ballooned, and the costs of the Iran war are mounting. (Reuters: Jonathan Ernst)
It's an unpalatable choice.
But investors now must consider which poison will cause the least harm.
With civil unrest running rampant across the developed world and global investors desperately seeking exits from the great artificial intelligence boom, a double dose of debt worries has suddenly infected the world of finance.
One is a problem decades in the making, as governments spent their way out of various crises with nary a care about the cost.
The other has arisen in a frighteningly short time, driven by a manic investment boom that used trillions of dollars of borrowed cash to fund a technology with debatable benefits for society.
Over the past eight weeks, competing demands from those two piles of debt have coalesced into a dramatic repricing of borrowing costs.
Financial markets are perennially worried about the next crisis.
But they now find themselves debating whether a sovereign debt crisis would be worse than an undoing of a technology boom that has driven stock markets since before the pandemic.
The one thing over which there is no dispute is that, if there is a meltdown, interest rates will provide the trigger.
The US Federal Reserve meets tonight and tomorrow, and while there is little chance of an official US rate hike this time around, markets are convinced that December will likely see an increase.
Either way, it's academic.
The US government has seen the cost of its long-term borrowings soar in recent months as bond markets, concerned about the mounting cost of its war in Iran coupled with US President Donald Trump's massive tax cuts, have pushed debt costs higher.
America's debt is now equivalent to 126 per cent of its economic output, the highest it has been in the post-war era, with no plan to reverse the trend.
The annual interest cost on that $US40 trillion ($56 trillion) debt has topped $US1trillion, creating a snowballing budget deficit.
The great AI unravelling
They've been falling like bowling pins in recent weeks.
It began with the Firmus float flop, an audacious $44 billion grab for cash that may have gotten across the line just a few months earlier.
Last week, NextDC — a long-established Australian data centre builder with a strong track record — saw its share price plunge 42 per cent after Melbourne residents successfully delayed a monster computer shed in the suburbs.
Local dissent can delay or derail data centre projects, as NextDC found out. (ABC News: Kyle Harley)
A similar incident occurred in Sydney recently, when Goodman Group canned a data centre in the northern suburbs.
It's a story resonating across the developed world.
CoreWeave, a US neocloud like Firmus that rents out its chips and computing power to AI firms, has seen its stock drop 36 per cent in the past month on concern over its mounting debts.
The Nasdaq exchange, dominated by global technology firms, has just endured its worst fortnight since April as developed nations collectively turn their backs on AI infrastructure.
A recent Gallup poll in the US found 71 per cent of Americans opposed data centres. Of those questioned, only 53 per cent opposed nuclear power plants.
Continuing those delays will dramatically slow the expected rollout of AI technology to businesses and firms.
That, in turn, could undermine revenue for AI firms and destabilise those that have taken on huge debts to fund their investment.
Those concerns have escalated dramatically in the past two months.
ASIC takes a deep dive
It's not all bad news.
Unlike the global financial crisis, where debt problems emerged out of left field, monetary authorities and market regulators are warning and preparing for the worst this time around.
In Australia, the Australian Securities and Investments Commission (ASIC) is taking a helicopter view of national financial markets to ensure they are operating for the interests of all.
From the deeply troubled Australian Securities Exchange (ASX) to private credit markets, fixed income, commodities and foreign exchange, it is holding round table talks to improve their operation and eliminate friction points.
ASIC commissioner Simone Constant says the watchdog has two key themes running across all markets: resilience and transparency.
"Resilience gives you strength, transparency gives you trust," she says.
And the corporate watchdog is aware of the growing risk facing Australian investors and institutions.
Simone Constant says the regulator is observing market volatility not seen in a long time. (ABC News: Billy Cooper)
"Global markets are becoming more integrated and are open more hours than ever.
"Capital flows are going offshore as much as onshore because of the dominance of tech stocks.
"There's high and strategic risk … and giant pools of savings in Australia."
During the 2008 financial crisis, a complete absence of transparency from ratings agencies, auditors and little-known corners of debt markets trading instruments that were mostly unregulated created panic across the financial system.
No-one knew who owed what or which bank held a toxic pile of worthless IOUs. As trust evaporated, the system ground to a halt.
Will France lead the world into economic crisis?
ASIC's overview won't stop a market crash. But it will limit the potential for regulators to be blindsided.
"We're seeing movements in spreads and volatility that we haven't seen for a long time," Constant notes.
The view from the helicopter may improve market efficiencies, she adds, the benefits of which will flow through to Australian investors, including those exposed through their superannuation funds.
"We don't want to be a regulator that fears the risk of the challenges ahead.
"It's about adapting to it with that trust and with that strength, that resilience and transparency give."
The AI payday
The prospect of a simultaneous sovereign-debt crisis and a stock-market collapse of hugely indebted companies terrifies many investors.
But some argue that an implosion in one area may ease problems in the other, as interest rates would fall sharply.
Either way, it would still hurt.
In the early days, big tech companies funded their AI dreams through their enormous cash flows.
But as capital expenditures escalated and the boom expanded beyond the technology itself and into hardware like chips and then architecture like data centres, everyone turned to debt markets.
Even the giants, Alphabet, Amazon, Meta and Microsoft, have raised more than $US200 billion between them this year alone.
Nvidia, the world's biggest company, has raised more than $US80 billion this year and routinely finances data centre firms like Australia's Firmus to roll out new data centres using its chips, making it a financier and supplier.
Then there are the "innovative" financing arrangements such as "Special Purpose Vehicles" financed by industry suppliers and investors, along with what is known as "chip financing" as well as debt guarantees and lease arrangements that cloud the boundaries between financing definitions.
And these figures barely scratch the surface. Private credit firms, pension funds, sovereign wealth funds and a host of financiers have gleefully handed over cash.
For years, technology and artificial intelligence have had investors enthralled and have driven stock markets to record levels.
Australia's superannuation funds have dived in with their ears pinned back, delivering double-digit returns to members.
But now comes the reckoning.
What if the rollout stalls because no-one wants a big humming data factory in their backyard?
What if China produces an ultra-cheap version of AI that undercuts Silicon Valley?
Or perhaps something more fundamental, like the pencilled-in sales revenue falls short and simply isn't enough to make the interest payments on the debt?
No wonder Wall Street is getting cold feet.
No comments:
Post a Comment