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The market is at risk of a damaging debt bubble developing, which could spread losses across the financial sector.
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Economist Dambisa Moyo warns of overvalued stocks as a result of enthusiasm for artificial intelligence.
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Moyo highlights the danger of heavily financed, unproductive assets, similar to the 2008 crisis.
The stock market could be facing one of the most damaging types of debt bubbles, with losses spreading across the entire financial sector, according to an economist and veteran investor.
In a recent op-ed for Project Syndicate, Dambisa Moyo — an economist, Goldman Sachs alumnus and current managing director of Versaca Investments — pointed to growing fears that the stock market is becoming overvalued. Wall Street’s enthusiasm for artificial intelligence has fueled massive gains for mega-cap tech stocks this year, pushing all three benchmark stock indices to new records.
“The signs of bubbles emerging in financial markets are clearly visible,” Moyo wrote. “Such trends certainly warrant concerns about new bubbles emerging in the stock market.”
But more worryingly, the U.S. could be facing one of the most problematic types of bubbles, fueled by heavily borrowed and “unproductive” assets, Moyo said. Those assets do more damage to the economy than productive assets, or assets financed with cash or equity, where losses are more limited to direct investors.
The “best” example of that type of bubble is the subprime mortgage crisis, she added, when an oversupply of housing and risky lending practices collided and home prices fell by a third.
Most economists don’t see such a scenario happening today, thanks to tighter lending standards in the banking sector. But many companies that appear heavily borrowed and unproductive appear to be financed in the shadow banking sector, Moyo said, where there is little oversight of debt-taking.
Distress is already mounting for some of the most indebted and least profitable companies. Corporate bankruptcies are now rising at their fastest pace since the pandemic, with bankruptcy filings rising to 346 in June, according to data from S&P Global.
Losses by struggling companies can also spread to other parts of the market, Moyo said.
“While a loss suffered by someone who has used their accumulated savings will have only a limited impact on the broader economy, losses suffered on ‘borrowed’ money, especially highly leveraged, can prove contagious. A system with little visibility into the sources and forms of capital underlying many investments is a risky system. Greater control over unproductive, leveraged assets is crucial to averting a financial crisis,” she said.
Other Wall Street experts have expressed concern about stocks and rising corporate debt, especially given the market’s high valuations. By one valuation measure, stocks appear to be the most overvalued they’ve ever been, even surpassing 1929 levels.
Read the original article on Business Insider
