ORLANDO, Florida: 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 US$105.6 billion, a 17-month high. This was thanks to a 4.3 per cent surge in imports to an all-time high of US$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 per cent 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 per cent.
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 per cent in September from a year earlier as semiconductor shipments more than tripled, while Taiwan's surplus in September hit US$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 US$1 trillion this year, while South Korea and Taiwan could post a combined US$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 US$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 ploughed into equities, with the overseas private sector buying US$131.9 billion of stocks, the second-biggest inflow on record behind June's US$144.7 billion. Foreign private-sector net inflows into US stocks in the 12 months through August stood at US$844 billion, up more than 30 per cent 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 totalled US$464 billion, also up more than 30 per cent 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 per cent last week.
Meanwhile, many of the bonds issued to fund the construction of data centres 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.
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