US Federal Reserve Chairman Kevin Warsh, accompanied by his wife Jane Lauder, walks to attend the afternoon session of the European Central Bank (ECB) annual forum in Sintra, Portugal, on July 1 (local time). /Reuters, Yonhap

IMF, BIS warn of AI leverage and recession risks, while BOE points to cyber vulnerabilities

At the European Central Bank (ECB) annual forum held in Sintra, Portugal, economists and central bank governors focused on warning about the impact that AI overheating could have on the global economy, the WSJ reported.

The Bank for International Settlements (BIS) warned the day before the symposium that some economies risk falling into recession if the surge in AI spending reverses. Tobias Adrian, Director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF), stated, "Leverage is building up on both the borrower side and the investor side, and leverage on both sides is highly concerning for financial stability."

Torsten Sløk, chief economist at Apollo Global Management, presented two risk scenarios: even if AI achieves massive success, job displacement could raise unemployment, leading to a recession through reduced consumer spending. Conversely, if AI falls short of expectations, current investments could become "problem investments" in terms of productivity and profitability.

The WSJ analyzed that the concentration of capital in AI-linked firms could amplify potential shocks, noting that AI-related investment-grade bond issuances account for nearly half of this year's total, and 87% of all venture capital investment. Furthermore, the top 10 companies in the S&P 500 index on the New York stock market now make up about 40% of the index.

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European Central Bank (ECB) President Christine Lagarde (center), Bank of France Governor Emmanuel Moulin (right), and Imène Rahmouni-Rousseau, Director General of Market Operations at the ECB, walk to attend the ECB forum in Sintra, Portugal, on June 30 (local time). /Reuters, Yonhap

Sarah Breeden, Deputy Governor of the Bank of England (BOE), pointed out that while AI models can detect corporate cybersecurity vulnerabilities, not all companies have access to these models, and applying patches takes time, leaving opportunities for malicious actors to exploit these vulnerabilities through reverse engineering.

Isabel Schnabel, Executive Board Member of the ECB, warned, "It is not difficult to imagine a scenario where a cyberattack on a major cloud provider simultaneously paralyzes numerous financial institutions."

Tiff Macklem, Governor of the Bank of Canada, also cautioned, "The internet has advanced beyond anyone's imagination, yet the dot-com bubble still occurred. There is no reason to believe that markets will not experience a phase of running ahead of themselves."

However, US Federal Reserve Chairman Kevin Warsh dismissed the pessimism, predicting greater prosperity by stating, "We are in the first or second inning of this revolution."

An interior view of the New York Stock Exchange (NYSE) in New York, US, taken on June 1 (local time). /Reuters, Yonhap

Burry warns on Samsung, SK Hynix investments; increases bets on Tesla, SOXX declines

Michael Burry, head of Scion Asset Management—who famously bet against the US housing market before the 2008 financial crisis and served as the real-life inspiration for the movie "The Big Short"—pointed to the recent announcement at the Blue House on June 29 regarding Samsung and SK Hynix's plan to invest over 500 dollars billion (775.75 trillion won) in a Honam semiconductor hub as a sign of AI overheating.

On June 30, the day after the two companies announced their investment, as chip-related stock prices surged, Burry wrote on his Substack, "The direct cause of today's rally is the massive spending announcement out of South Korea. I view this as the beginning of the end."

The WSJ reported that Burry has added new short positions against Tesla, Caterpillar, Applied Materials, and the SOXX Exchange-Traded Fund (ETF), which tracks semiconductor indices, while maintaining a short position on Nvidia for several months.

Burry's put options on the SOXX ETF are structured to become profitable if it drops to about one-third of its peak, and his bet against Tesla comes with a price target of 416.22 dollars (645,765 won). While Nvidia's stock price sits about 5% lower than the day Burry announced his short position and Palantir's stock has tumbled around 40%, Nvidia denied the circular financing issues raised by Burry, and Palantir CEO Alex Karp strongly criticized him.

The backdrop to Burry's short selling also includes factors such as the US government intervening in Anthropic's release of its Mythos-class AI model due to national security concerns, and Microsoft offering lower-cost options in response to the shock of mounting AI licensing fees.

                                                                                                               Ha Man-joo