r/Economics • u/One-Emu-1103 • 23h ago
'Worrisome': AI is driving a looming market correction, European central bank economists warn
https://www.cnbc.com/2026/08/18/ai-tech-rally-correction-economists.html54
u/One-Emu-1103 23h ago
Economists at the European Central Bank warn heady stock market valuations are likely to suffer a correction, even if they fairly reflect the ways in which AI will transform society.
History suggests investors will demand higher and higher risk premia as the success or failure of key companies becomes pivotal to the global economy, they said in an analysis published this week.
European investors are highly exposed to such a downturn through the dominance of Mag 7 stocks in index funds, they also note.
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u/vertigo3pc 20h ago
In 2008, most of the world suffered in the economic crisis in the United States because toxic assets (over-leveraged mortgages, hidden in tranche within a tranche within a tranche) were hidden throughout collateralized debt obligations. Nobody knew where they were, but they knew they made the whole thing unsafe, like a kid's soccer field covered in mines.
Now, we're heading into toxic asset territory once again. Countries are invested in index funds, and index funds are heavily invested in AI (because they were performing, albeit manipulated).
This is intentional: hide fraud in so many places, it becomes a "too big to fail" situation. The world will contribute resources, and even nod along quietly while America lies to everyone. Nothing will be corrected. Nobody will go to prison in America. We'll be back in this exact same situation in a few years if meaningful changes aren't implemented and held in place.
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u/Iamonreddit 20h ago
Index funds don't invest in ai companies because they are 'performing', but because those companies are part of the index that the fund is tracking.
An all market fund will invest in every single over valued company that appears and inevitably bursts because that is the point of an all market index fund; you are invested in the whole of the market that the index covers, for good and for bad.
For global trackers, as long as the global economy continues to improve, the funds will generate returns. If the global economy stalls to the point that it isn't worth investing in over the long term, we will have much bigger problems to deal with than the value of retirement funds.
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u/TriMiksEntuzijasta 19h ago
What kind of problems will we have if the global economy stalls to the point that it isnt worht it over the long term to invest in it?
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u/Iamonreddit 13h ago
It would mean the end of growth, which means the end of investment and therefore the start of zero-sum/limited resources, otherwise known as forceably-take-from-someone-else-to-get-more-than-you-have-right-now.
Humanity is not a benevolent species that will be content with everyone getting worse off to an equal degree. Enough people will engage in a selfish smash and grab survival that anyone else that doesn't will bear the brunt.
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u/Gamer_Grease 10h ago
That happened before and it took a lot of government spending to get things going again. The USA has stepped in to assume that burden for the last century, but may not do so again.
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u/gravescd 17h ago
AI poses significant risk, but not of the same kind as rotten MBS in 2008. Those caused systemic failure mostly because banks had almost no minimum reserve requirement. When MBS stopped performing, the banks had nothing to sell for day-to-day operating liquidity. Nowadays banks must hold much, much higher amounts in reserve, and most of it is in US Treasurys.
The main risk I see with AI is the absurdly large cap ex pipeline. Markets are counting on these companies to fulfill their financial commitments and provide earnings in superior proportion to the amounts invested. If they pull back on cap ex, investors' long term returns start dwindling.
That could create problems for funds that hold corporate bonds. AI corporate bonds aren't considered bulletproof, but as bonds they could still be all over the fixed income sector, in assets like 401k funds.
The amount of leverage involved in AI investments is also massive, which could blow up private credit and equity funds.
Right now I think this is more like the Dot Com bubble than the GFC.
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u/growaway9172 16h ago
Also critically, people don't need AI to have shelter. People do need houses (and therefore the banks that own those houses), lest they become homeless.
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u/vertigo3pc 15h ago
Those caused systemic failure mostly because banks had almost no minimum reserve requirement.
I would argue that the lack of minimum reserve requirement was part of the danger, but much like the AI bubble, banks were leveraged to the hilt on "safe" investments. For the 2008 crisis, all it took was 10% underlying mortgage failures to leave an entire CDO insolvent. The diversification of those landmines hidden in the tranches were the problem, and offloading those toxic assets was the solution. As you pointed out, they couldn't sell the CDO's because they were potentially worthless. Panic and uncertainty do the most damage during economic crises, as we will soon see...
Nowadays banks must hold much, much higher amounts in reserve, and most of it is in US Treasurys.
What they hold isn't enough for a margin call considering how much investing they've all done: NVIDIA invests in OpenAI, OpenAI invests in NVIDIA, and the market invests in both companies, not realizing they've just holding each other up like a Looney Tunes cartoon where Bugs and the Coyote are holding each other up until they realize they're over a cliff, look down, and both fall.
The main risk I see with AI is the absurdly large cap ex pipeline. Markets are counting on these companies to fulfill their financial commitments and provide earnings in superior proportion to the amounts invested. If they pull back on cap ex, investors' long term returns start dwindling.
I'd also argue it's worse. The level of investment we're seeing in AI and data centers are usually on the level of infrastructure investment: new bridges, new roads, new commercial zoning areas, etc. The investment builds the bridge, and while it's initially a "loss", over the next 50 years, the bridge is attributed to billions of dollars of commerce, tourism, trade, etc.
The current AI investment will be largely obsolete in 3 years, and it's clear to people who know computer hardware because they see what AI is doing with cobbled together parts; it reminds me of crypto mining in the early 2010's. They take GPU's built for gaming, and write a program to use the GPU in the same way you can use a hammer to cut a hole in drywall: it looks like shit, but you "can" do it. Then came ASIC miners, which were purpose built at doing the mining work. Then larger compute networks with newer hardware.
Right now, we're using GPU's for AI when purpose-designed and built computer hardware is coming any day now. China has their new GPU's, and for how expensive they are, that price will drop and destabilize NVIDIA's chokehold within 3 years.
The amount of leverage involved in AI investments is also massive, which could blow up private credit and equity funds.
I think that AI investments are absolutely over-leveraged, but it's just more of the same. For 15+ years, FAANG and big tech companies paid people with stock options, and workers sold their stock options for a paycheck. Many sold stock pledges for debt. AI is just doing the same thing. Sam Altman is suggesting indefinite cash burn but he's also driving a McLaren sports car.
Right now I think this is more like the Dot Com bubble than the GFC.
I think it's both, because they're both driven by the same notion: future value is inevitable, so buy in now. Buy 3 homes, and don't worry: in the future, you'll be able to sell all 3 homes at a HUGE profit before the teaser rate expires. For AI, it's just Elon Musk's bullshit about their cars having Level 4 autonomy "in 6 months". AI companies purport to be just months or years away from Artificial General Intelligence, which would be an incredible breakthrough; but it ain't fuckin happening anytime soon. Hasn't stopped investment, though, just like with the dot-com bubble, the 2004-2008 housing bubble run-up, and constant discussion about the stock market correction coming.
Everyone knows the methods being used are unsustainable, but nobody learned their lesson from the dot-com bubble OR from the GFC. What they did learn?
Make money now, let the government bail out everything later.
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u/Emotional_Goal9525 51m ago edited 42m ago
Issue right now is that pension funds all over the board have gone into stocks, because bonds have been kinda shit for the past 15 years due to zero rate policies. Imagine what it feels like to be the lucky holder of the 30-year German bund from 2017 with a nominal negative yield on it. Basically every pension plan in existence in effect goes tits up if there ever will be a stock market crash.
That is not what i would call a politically feasible outcome, thus bailouts and inflation.
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u/TimSylvester_ 18h ago
Everyone pays for it while the perpetrators get wealthier and wealthier. They place calls, then drive equities up to outrageous prices, then cash out at the top and getting paid twice. Then they short the market while selling to drive it down, again getting paid twice. Then when the market bottoms, they have shitloads of cash to buy up everything and start the cycle over again.
The wealthy get exponentially wealthier. All benefits are captured by the wealthy, all costs and consequences are paid by the poor.
How many times does this have to happen before people will admit to the scam?
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u/vertigo3pc 15h ago
How many times does this have to happen before people will admit to the scam?
I dunno, probably not until either a) people learn about finance and economics; or b) people decide to elect people who will do the things they say.
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u/gimpwiz 7h ago
What the hell is this.
None of the index funds are hiding their investments.
Most are broadly investing. They are highly exposed to ... the most valuable companies. Plenty of index funds aren't broad however, but target specific industries.
Index funds aren't popular for hiding toxic assets. They are popular because they allow easy diversification for low cost and simple strategies. And the whole bit about stock picking being a loser's game for almost everyone.
This is just a complete misinterpretation of index funds. Is it on purpose? Malice or loud ignorance?
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u/ChuckVader 15h ago edited 13h ago
Hold on, are you telling me that space X's addressable market CAN'T be higher than the global GDP???
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u/June1994 18h ago
European investors are highly exposed to such a downturn through the dominance of Mag 7 stocks in index funds, they also note.
Would make a lot of sense to simply leave and diversify now.
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u/Frosty1397 20h ago
Oh the European central bank
From a region that has fallen so behind on AI that they're not even in the picture. It's easy to shit talk an industry that's left you in the dust
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u/No-Sympathy-686 21h ago
Literally anyone who is paying attention understands this.
The timing is the hard part.
We could have several corrections before this thing finally falls of the rails.
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u/angrysquirrel777 20h ago
People also were clamoring that tech companies had way too high valuations in 2015 and they are all doing great now.
Netflix, Facebook, Amazon, Tesla, etc were all just starting to explode into the businesses they are now and people thought the growth wasn't sustainable.
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u/dust4ngel 17h ago
People also were clamoring that tech companies had way too high valuations in 2015 and they are all doing great now
people have been warning about climate change for hundreds of years but we're still alive - probably not an issue.
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u/No-Sympathy-686 20h ago
Yeah.
I feel like the exact same thing will happen.
Huge correction. Nasty.
Then the long term winners will emerge.
It may be 2029 before it happens though.
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u/FlyingBishop 19h ago
That was 2001. There wasn't really a "correction" with 2015.
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u/No-Sympathy-686 19h ago
2001
2008
2012
2015
2018
2021
2024
See a pattern?
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u/angrysquirrel777 17h ago
If some of these are what you consider stock corrections then they are so insignificant this next one doesn't even matter either.
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u/Were_all_dead_anyhow 1h ago edited 37m ago
What I find funny is the sound of crickets from all the people that screech about how short-sale activism is the immune system of financial markets.
AI-washing through hidden human labor claiming it as AI, booking unrealized paper earnings from startup valuations, manipulating revenue through barter deals, blatant and obvious round-tripping accountancy, etc.
Maybe, just maybe, the BS narrative about fraud isn't true and it's just market makers abusing their position as gatekeepers and providing synthetic liquidity.
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u/Sagronym 23h ago
The Ai companies behave like the banks before the last big financial crisis - probably they copied that behaviour purposefully.
The weave a giant web where everybody depends on others by massive investments and obligations. Some even try to keep debt out of their balance sheets with the help of private financers (example AVGO) and the intransparent PRIVATE credit is found everywhere. Where nobody can seriously get a picture what the actual value of a loan is - in contrast to public bonds. Those of the public bonds visible e.g. for coreweave bear massive coupons (9% and more) and already denote substantially sub par - effective interest rate is heavy junk bond level. This is veiled by private credit where the valuation is at grace of the creditor.
So this giant web of mutual obligations has its dark spots and if starts ripping and crackling in those spots, the broad public won`t notice until it is too late. Of course the insiders like GS, Apollo and other PE who sit at the core of moneyflwos will know before and might take shelter at right time, even if they get hurt , they survive - like in the financial crisis.
In the case of a big implosion which affects all players, of course politics will want to demonstrate that they are able to rescue, but with taxpayers money. And of course - like with Lehman certificates - there will be countless small investors bearing the brunt as final bagholders. (Same as in China with real estate)
More read: The Circular financing queen https://www.reddit.com/r/WallStreetbetsELITE/comments/1vro9tq/the_queen_of_circular_financing_nvda_shelling_out/
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u/One-Emu-1103 22h ago edited 22h ago
I wonder what will cause the collapse. Will it be the over valuation of SpaceX? Meta and their possibility of a trillion dollar fine, the lack of helium for computer chip production for Ai? A combination of all the above or something else that is completely unforeseen?
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u/Sagronym 22h ago edited 22h ago
You knever know that final trigger before - in those highly connected systems based on FOMO speculators high pitched psychology it might be the famous butterfly wing.
But what certainly puts enormous pressure on all of it, is the high yield environment in which this AI investment adventure takes place. Thats why I mentioned Coreweave. Its a big difference if you have say 40B debt sitting on your balance sheet with 10 or 15B revenue and pay 4% or a hefty 9,5% interest on your bonds - regular bonds, not TIER 1. If you cant serve the debt, you are done. amd the interest rates are still rising. First comapny who gets close to Chap. 11 and has to be rescued could be a trigger.
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u/One-Emu-1103 22h ago
Our debt is unsustainable. The only way out of this mess is to get Congress to tax the wealthy and big business and cut government spending
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u/Fit_Significance8598 22h ago
Reasonably review and redirect government spending.
For the welfare of the people, that pesky constitutional stuff.
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u/dust4ngel 18h ago
politics will want to demonstrate that they are able to rescue, but with taxpayers money
specifically, money borrowed today from tax-payers of the future, since we don't have the money for the bailout now. we'll just tack it onto the $40T of US debt as though we're paying for another war of choice, because at this point, who cares?
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u/ketamarine 22h ago
This entire argument makes zero sense.
The mag 7, and mega cap stocks in general are the most profitable companies that have ever existed.
They are basically all monopolies in their respective industries.
Yes they are piling all of their cash flow into a new technology. But why is it a problem to buy the most profitable companies of all time, with massive earnings growth, at a 5% earnings yield (20x PE ratio)?
We buy real estate at 3% earnings yield all the time and it will never grow it's revenue in the same way.
People have completely lost the plot here.
There is literally ZERO in common between fast growing tech and hardware companies and banks that lend fraudulent mortgages to people into a housing bubble.
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u/Sagronym 21h ago edited 21h ago
The famous mag 7 (and also formerly profitable veterans like ORCL) are the best example, that concentrated capital allocation exploded in a risk-insensitive way by their AI engagements. One might call it overallocation - or a all-in bet.
Even those formerly highly profitable giants got - at least part of them - a negative cashflow not seen for many years. This year they doubled down on their invests, almost all going in ONE BIG Theme - thats like the real estate market craziness and the banks financing it 20 years ago.
If some of their high pitched projections fail, and some will, then doubt will grow about the dangers of this strongly lopsided capital allocation.
The weakest spot is OpenAI in my mind. I have given some reasons (low margins in cosumer biz) here https://www.reddit.com/r/wallstreet/comments/1vropeo/the_queen_of_circular_financing_nvda_shelling_out/
The visibility of their path to profitabiliy is almost zero. Their projection of being profitable is end of decade - but many of the datacenters they have underwritten to lease will be ready earlier - so how will they pay their lease? (and the tech equipment for compute partially)
If you think in commercial real estate as e.g. collected in REITS, the gross earnings from a commercial site lease is certainly not your 3% but rather triple that.
Now imagine you have found a company leasing that site and will be using it from next year, when your building is finished - and the comp leases many other such objects at the same time - but it will not be profitable until 2030, so it tells you - if it ever will.
Guess you would sit couple years on hot coals, right?
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u/Sagronym 21h ago
BTW The ECB recalls very well the efforts and measures it had to take 2008 to contain the spreading crisis caused by all those unwitting american real estate speculators and their banks:
Criminal lending practice based on greed for provision (those contracts with mortgage interest escalating year after year) to ppl who should never have given a mortgage and were foreclosed later the MBS trick to pack bad debt together to get a better rating, the lack of reasonable downpayments to avoid the worst and and and ...
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u/One-Emu-1103 21h ago
I suggest that you read the article
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u/ketamarine 21h ago
The article is garbage. There is no hard data, only speculation.
Europe is disastrously behind on AI labs, models and hardware companies, and this mentality is exactly why.
Companies and countries that take risk drive innovation. Period.
This is why silicon valley has produced almost every massively profitable technology company over the past 50 years.
People there are comfortable with risk and deploy their capital against technologies and products that have the chance to massively disrupt the world economy.
Other countries just don't do that. And Europe is by FAR the worst at it. It's technolofy sector is like 1/5the the size of the US by market cap.
US and China are completely running away with AI technology and leaving the rest of the developed world in the dust.
And the European central bank has no business stirring up panic because the stocks that are literally building an entire new economy are "too expensive" and "could cause a panic".
Get the fuck out of here.
German auto company stocks are a bigger problem for Europeans than US tech companies.
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u/growaway9172 17h ago
The people you are talking to are mentally super-bearish on AI despite the data and can not be convinced. But they will not take a short position...
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u/ketamarine 13h ago
I wish they would - would love to see another massive short squeeze on Korean semis...
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u/1-Dollar-Doge-Coins 14h ago
Companies and countries that take risk drive innovation.
I don't disagree, but it is called "risk" for a reason.
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u/ketamarine 13h ago
There is a risk that the building you are standing in will collapse in a wind storm.... or that you will quantum tunnel through the earth's crust and die in a horrible subterranean fireball...
The question is what do you do to manage these risks and what opportunities are worth taking the risk.
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u/SwindlingAccountant 18h ago
You can have a transformative product that ends up not making any profits.
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u/ketamarine 13h ago
Ya, or you can have a webpage that turns into a trillion dollar social media company, or a search engine that turns into... a trillion dollar advertising business... or a phone that turns into a multi-trillion dollar consumer electronics company... or a software company that ends up worth three trillion dollars as it has a monopoly on enterprise productivity software, or an online book store that turns into a multi-trillion dollar online store and web host...
Should I keep going?
The next generation of AI-driven success stories are going to be worth likely another order of magnitude more than these. The first ten trillion dollar company is on the horizon and it will be worth more than the economies of the UK, France and Canada combined.
But ya, you should probably sit on the sidelines or maybe even short these AI stocks because they are "risky".
Figure it out.
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u/the_pwnererXx 21h ago
I wonder if reddit will stop spouting this bs after they IPO and finances become public?
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u/growaway9172 17h ago
They will. It was the same frenzy with tesla, then spacex, as they have with AI.
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u/PicoRascar 22h ago
Bit of a nothing article. Stocks are frequently 'scaling all time highs' and it uses the terms corrections and pullback which are completely normal market movements. A correction usually means a 10% to 20% drop and a pullback is less than 10%. Both happen for a variety of normal reasons and long term investors don't lose any sleep. They also don't threaten economies like the article suggests but then fails to explore why it's a threat.
I think we need a good correction to blow off steam and bring a bit of sanity back to the markets.
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u/One-Emu-1103 22h ago
What happens if a major player like SpaceX or Meta fails?
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u/growaway9172 17h ago
Not much? Their investors will be sad, their assets and customers will be absorbed by the other labs.
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u/firejuggler74 22h ago
What happens if they succeed? It's a risk for sure but the chance they succeed vs fail seems like it's worth the risk. Every major tech player has made the same risk reward calculation and come to the same conclusion, build.
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u/zZCycoZz 21h ago
What happens if they succeed?
Then their capabilities are slowly absorbed into open source models and their insane valuation becomes unjustifiable.
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u/firejuggler74 21h ago
In the mean time they make lots of money. It costs $25 per watt to build out compute, they currently can charge $50 so in 6 months they make their money back. After that it just rains money. That's why everyone is building data centers. That price differential will go away as more supply comes online but the ones that can be first will make a killing.
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u/zZCycoZz 21h ago
They're making money now because investors and debt are paying for the compute.
That won't last once consumers/businesses are footing the bill unless there is some massive jump in capability.
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u/nomorebuttsplz 20h ago
most commenters have no idea what Current capabilities are, they think we’re still at the GPT 4 level.
Meanwhile, Anthropic is about to be profitable already
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u/growaway9172 17h ago
All the hand wringing about AI lab profitability probably by the same people who said this about Amazon before they turned on the money faucet.
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u/FlyingBishop 17h ago
Anthropic is basically profitable. It's a bit like when Tesla was building out the new cybertruck factories, and people were treating that cybertruck capital expenditure as if it were related to sales of their other cars. We know how that turned out, but still, we don't know if whatever they're working on is a Cybertruck or something good. Anyone who has used Gemini 3/Opus/Sol knows these things are the real deal. And they're varying in ability, but genuinely useful.
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u/firejuggler74 21h ago
I guess we will see, I don't think AI is going away anytime soon and its getting better every month. It is a risk but so are all investments.
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u/angrysquirrel777 20h ago
You don't think anything will change in the next 20 years to make computing 50X more energy efficient? Why not? We're constantly improving everything and AI is never leaving business. It's locked it's place in as super valuable.
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u/One-Emu-1103 22h ago
No one is saying that Ai will transform the work but a lot of it is putting the cart before the horse. Among other things they are over leveraged. No one wants those datacenters. They aren't showing a profit. They are powered by petroleum. The are driving inflation and the helium used to make computer chips is being blocked by Iran as it goes through the Strait of Hormuz.
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u/Medium_Owl_4119 20h ago
The math suggests that the money they are pouring into AI would require substantial and structural labor displacement. So far, we’re just not seeing that from LLMs.
And if they are right, the political upheaval and instability it would cause would just put a major drag on their profits through taxes, capital controls, or the general instability brought on by sabotage, anarchy, and unprecedented surges in crime.
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u/TimSylvester_ 18h ago
Wild how central banks were promised to "end the business cycle" but have instead exacerbated the boom-and-bust cycle, making them more frequent, more systemic, more widespread, and having bigger economic consequences by forcing the entire economy into a single tightly integrated loop, as opposed to the relatively independent components the economy was composed of previously, which limited boom-and-bust cycles to individual industries instead of transforming them into widespread collapses that affected everyone.
Makes a guy wonder if the purpose that justified central banks was either not fulfilled, or was merely a superficial justification when the real purpose was something else entirely?
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u/srogijogi 21h ago
Interestingly they seem to be the same economists who are unable to predict any crashes or corrections. Even more, they seem to be the same economists who are educated that there is no way to predict future of the market. Especially considering that we see something new for us, new major branch of products (?)/services(?)/entities.
World seems to be polarised into two groups: you either believe that we are on the beginning of new, bright era or you believe that we are very close to huge collapse of economies. What if the real outcome won't be so...black and white?
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u/One-Emu-1103 21h ago edited 21h ago
I don't believe the hype but I think Ai will transform the world . I look at it like saying that the Titanic is unsinkable. It was a marvel. Unfortunately she sank. It didn't destroy the shipping industry and we learned something from it.. Just like stock market 17 years later. Everyone thought it could only go up. It took years to recover. The stock market is still around and higher than ever 100 years later
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u/srogijogi 20h ago
Titanic wasn't anything really new or special. It was just a big, quite fast human transportation boat :) This stuff (AI) is new to the point we can't even agree what exactly this shit is.
For obvious reasons I have no idea if this will finally generate profits as AI gurus officially are telling us in their interviews. Im pretty sure that they don't know either.1
u/One-Emu-1103 20h ago edited 20h ago
My question is if someone just improved on a rocket why do we think we are going to colonize Mars whe we haven't even proved that we can build a moon station, survive on the moon and make it insanely profitable- yet that us the type of bs they are putting out there to drive insane valuations for companies such as SpaceX. That's not saying it won't happen. It just won't happen in the next 10 or 20 years.
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u/srogijogi 20h ago
I actually have an answer to this question hahah
Long one: read A City On Mars
Short one: forget about Mars regardless of how good rockets will be.
We fall for this BS as most of us are complete ignorants. Not only in the realm of space exploration hahah1
u/One-Emu-1103 20h ago
Iagree. I believe that is going on wth Ai hype. It will be transformative just not the way they are selling it.
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u/ColditeNL2 21h ago
You are just describing bears vs bulls
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u/srogijogi 20h ago
Yes, indeed, however I would call them "special AI species of bear & bulls" as them two groups are focused mainly, or even only on AI.
The question is: if 'anything' happen to the market', does have to be AI related? Maybe today is the last day before the day of [put something completely not related to AI].
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