ROI-Ballooning global imbalances risk amplifying messy AI unwind: McGeever

Global imbalances are expanding, with the US trade deficit ​on one side and outsized Asian surpluses on the other posing growing risks to economies and markets worldwide. AI ​lies at the heart of it. The US trade deficit widened in August ‌to $105.6 ​billion, a 17-month high. This was thanks to a 4.3% surge in imports to an all-time high of $420.8 billion as companies sucked in the computer chips, equipment and materials needed for the record-busting AI buildout. A Federal Reserve Bank of Minneapolis paper in August estimated that around 70% of US firms’ AI-related capital spending is on imported goods.

Many of these shipments ‌are coming from a handful of countries in Asia, such as South Korea, Taiwan and China, whose trade surpluses have exploded to historic heights in recent months. China's exports this year have leapt by 22%. Economists at Barclays estimate that semiconductors and automatic data-processing equipment and parts account for almost two-thirds of that. The contribution of AI-related goods to South Korea and Taiwan's export boom is even greater. South Korea's exports jumped 83.5% in September from a year earlier as semiconductor shipments more than tripled, while Taiwan's surplus in ‌September hit $23.6 billion, a monthly record.

Given these unrelenting flows, China is well on course to record a second consecutive annual trade surplus of over $1 trillion this year, while South Korea and Taiwan could post a combined $1 trillion current ‌account surplus next year, according to Brad Setser at the Council on Foreign Relations. The combined Asian surpluses are, for the most part, being recycled into US assets, mostly stocks, as overseas investors chase the pots of gold at the end of the American AI rainbow.

These widening external balances are ringing alarm bells. Officials from the International Monetary Fund and other international institutions warn that imbalances can distort asset prices and inflate financial bubbles, a dynamic that many analysts argue is already playing out. The consequences of a rapid, disorderly unwind could be extreme, potentially including a sharp depreciation of the US dollar, ⁠huge volatility on ​Wall Street, and a sudden spike in global interest rates. Last ⁠week’s ructions in global equities may have been a sneak peek. FLOWING TO THE STREET

US trade deficits and sky-high Asian exports are nothing new, but what’s changed in recent years is where the surpluses are flowing. In years gone by, Asia's surpluses were typically reinvested into US Treasuries as Asian central banks ⁠sought to build their foreign currency reserves. As a result, US bond yields were capped, US consumer demand was propped up, and economies on both sides of the divide kept growing.

But those surpluses are now flowing into Wall Street. Treasury International Capital (TIC) data on Friday showed that ​foreign investors' net purchases of US securities in August jumped to $279.2 billion, a record amount for a single month. The vast majority of that came from the private sector, with more than half of it plowed into ⁠equities, with the overseas private sector buying $131.9 billion of stocks, the second-biggest inflow on record behind June's $144.7 billion. Foreign private-sector net inflows into US stocks in the 12 months through August stood at $844 billion, up more than 30% from a year earlier.

Investment is also flooding into the US corporate debt market, where issuance from ⁠hyperscalers ​and others involved in the AI buildout has rocketed. Foreign purchases of US corporate bonds in the 12 months through August totaled $464 billion, also up more than 30% on the year. Everyone, it seems, wants in on the AI mania.

Of course, this concentration heightens the risk of a disorderly exit when these markets turn. We already got glimpses of that last week. The Philadelphia chip index fell on Friday for the eighth straight day, marking its longest losing streak since October 2008. ⁠The index shed 11.5% last week. Meanwhile, many of the bonds issued to fund the construction of data centers have recently dipped into distressed territory below 80 cents on the dollar.

"In a severe scenario, we could see a market ⁠correction that cascades through the highly leveraged and circular AI ecosystem. Given ⁠the sizable cross-border holdings of AI assets, the losses could spread around the world," IMF chief Kristalina Georgieva wrote last week. If she’s right, the AI unwind could get ugly.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and ‌X.

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