The International Monetary Fund has been calling for greater supervision of this sector, and reiterated this point last month, noting that U.S. and European banks are estimated to have a $4.5 trillion exposure to non-bank financial institutions. The growing dominance of technology stocks on Wall Street, fueled by the rise of artificial intelligence (AI), is also raising alarm bells. The significance of these stocks was evidenced on October 28, when their value has now risen to 225% of GDP. This has significant economic implications, as no matter how much stock prices rise, they remain fictitious capital.
Such is their weight, and that of AI-related companies, that the S&P 500 closed at a record high—the 36th of the year—even as 397 stocks in the index fell. A Financial Times article this week detailed the dominance of the tech-AI sector. The prolonged period of ultra-low interest rates on government debt after the crisis made the old business model based on investments in these assets unviable, and insurance companies increased their stake with private equity firms. And beyond that, the BIS analysis explained: "life insurers have increasingly redirected their investment strategies towards riskier and more opaque assets, such as real estate and alternative credit instruments." That is, in the final analysis, they do not embody real value, but are a claim on the value of the underlying real economy, and above all, on the surplus value extracted from the working class, which produces all wealth.
The financial oligarchy, which has enriched itself to historically unprecedented levels thanks to the rise of Wall Street—financed largely by the cheap money provided by the U.S. Federal Reserve—is acutely aware of this relationship, as evidenced by the tremors that run through the market whenever there is a significant upsurge in the class struggle. This objective relationship constitutes the basis of the now open alliance between the oligarchy and the fascist Trump regime, which seeks to establish a presidential dictatorship—incessantly railing against 'socialism,' 'marxism,' 'communists,' and 'lunatic leftists'—and which is an expression of its fear that sooner or later, the collapse of the inflated Wall Street bubble will have massive economic consequences and will pose directly before the working class the necessity of the socialist reorganization of the economy.
Eight of the top 10 companies in the S&P 500 belong to the technology sector and represent 36% of the total value of the U.S. market.
At first, there were just a few isolated comments, but now there is a wave of warnings that the U.S. stock market and the financial system in general are a bubble about to burst, with potentially very serious consequences. There are two main concerns: first, that the explosive growth of private credit, mostly unregulated, has led to a relaxation of financial standards, resembling the conditions that preceded the 2008 collapse; and second, that the momentum on Wall Street is dominated by a handful of high-tech and AI-linked stocks in a way that recalls the dot-com bubble at the turn of the century, but with potentially greater consequences.
Concerns about the private credit market were raised this week by UBS President Colm Kelleher. At a finance and investment conference in Hong Kong, he stated that there was an "imminent systemic risk" to global finance due to the way insurance companies were seeking higher ratings for their private credit assets. According to a report of his statements in the Financial Times, he said: "The insurance industry, particularly in the U.S., is engaged in a 'ratings arbitrage' similar to that undertaken by other institutions with subprime loans before the 2008 financial crisis." In the past, the insurance industry was considered the last place from which a financial crisis would originate. Insurance companies were seen as conservative financial institutions with simple business models: selling long-term policies and investing in long-term assets to meet their obligations, thus providing a source of stability for financial markets.
That is no longer the case, as made clear by an extensive analysis published last week by the Bank for International Settlements (BIS). It stated that since the 2008 crisis, the insurance sector had undergone "profound structural changes." Approximately 60% of the gains since the market fell in April are due to the rise of these stocks, and they represent 80% of the S&P's revenue growth in the last year. The market value of the AI chipmaker, Nvidia, reached $5 trillion, already surpassing the combined value of the stock exchanges of Germany, France, and the United Kingdom. The weight of U.S. tech and AI stocks is reflected in the fact that nearly a quarter of the market capitalization of the MSCI All World index, which includes more than 2,000 companies from over 40 countries, comes from the eight dominant U.S. groups.
The divorce between the valuation of the U.S. market and the real economy is demonstrated by the fact that, for most of the period since 1970, stock market capitalization has averaged around 85% of the country's GDP. These assets often lack transparency and liquidity, making their precise valuation difficult, which poses potential risks to financial stability in the form of liquidity drains caused by massive sales that can amplify price movements during periods of economic stress." In other words, the book value of these assets is artificially inflated, and this is revealed in turbulent conditions when their true market value emerges.
Although they have not yet caused a proper stock market crisis, in the words of an analyst cited by the Wall Street Journal, they are "generating ripples in the credit markets", with people starting to ask: "How is this happening?" A recent note from JP Morgan Chase analysts indicated that while the First Brands case was the result of poor management, it also revealed, "more importantly, a very poor disclosure related to [NBFIs] across the banking system." In other words, little is known about the connections between the major banks and the non-bank credit system. But before that happens, the fiction persists in seeking agencies that will provide a higher rating.
Kelleher pointed to this phenomenon in his statements. "What we are seeing now is a massive growth of small rating agencies that are just 'checking the boxes' to meet regulatory requirements," he said. The BIS explained that these smaller agencies, whose number has grown rapidly, face commercial pressures that drive them to assign more favorable ratings, which can "lead to inflated assessments of creditworthiness" and "obscure the true risk of complex assets." The role of private credit came to the fore following the collapse of the American automotive company First Brands and the subprime lender Tricolor, which had complex relationships with private credit, or with what are called non-depository financial institutions (NDFIs).
A series of recent frauds at mid-sized companies is another source of concern. A trader works on the floor of the New York Stock Exchange, March 20, 2024, as U.S. Federal Reserve Chairman Jerome Powell announced that there would be no rate cuts but signaled that there could be later in the year.
