Full transcript
0:00You've heard enough of my and all these
0:02other YouTubers, pundits, and
0:04commentators telling you about how
0:06overvalued the AI bubble is and how it
0:08certainly is a bubble, but those
0:11actually in charge, well, they've been
0:13noticeably more quiet when it comes to
0:15calling this madness out. Likely as they
0:17fear being the ones to pop the bubble,
0:19directly causing the AI collapse. But,
0:22there's another risk facing those in
0:24authority, too. The risk of looking like
0:26idiots in a few years when they stood
0:28tall and told the world the AI bubble
0:31was perfectly fine and rational right
0:33before it came crumbling down. And that
0:35fear is starting to overwhelm some of
0:38the highest, most important officials in
0:40the world. So, this video, we're talking
0:43about Andrew Bailey. He's the governor
0:45of the Bank of England, the chairman of
0:47the Global Financial Stability Board,
0:49and he has just sent a letter to every
0:51single finance minister and central bank
0:53governor for the 20 largest economies in
0:56the world, warning them about the AI
0:58bubble. So, I'm going to show you what
1:00he said and break it all down for you
1:02today on this video. So, here we are.
1:04This is Stoic Finance with me, your host
1:06Max. And if you want to stay up to date
1:08on the financial news the legacy media
1:10won't show you, like and comment under
1:11this video so the algorithm shows you my
1:13future videos. And of course, subscribe
1:15to the channel, as well.
1:18Now, there are a few different things
1:19that Andrew Bailey is specifically
1:21worried about from valuations of AI
1:23companies, private and public, and debt
1:26to cybersecurity and the like. But,
1:28let's start off by understanding who
1:30Andrew Bailey is and why this statement
1:32is so important. Now, obviously, he's
1:34the chairman of the Bank of England. And
1:36the Bank of England, all right, it's not
1:37quite as influential as it was maybe 100
1:40years ago or so, but the pound is still
1:42the currency for the fifth largest
1:43economy in the world, larger than India,
1:46almost on par with Japan at this point,
1:48and twice the size of Russia. And the
1:50pound is also the third largest currency
1:52held by central banks' reserves in the
1:54entire world. So, the governor for the
1:56central bank which manages that currency
1:58and the monetary policy behind it, well,
2:00it's certainly worth listening to him
2:02from a base level. On top of that then,
2:04there is an organization called the
2:06Financial Stability Board. Essentially,
2:08it's an early warning system or a radar
2:11for the global economy and the systemic
2:13risks it faces. It's an international
2:15body that analyzes debt levels. It
2:18involves members from the 20 largest
2:19economies in the world and it analyzes
2:22debt levels, economic data,
2:24demographics, geopolitical risk, wars,
2:26commodities, and everything else you can
2:28think of and it tries to quantify
2:30systemic risk to the global economy so
2:32that countries around the world can then
2:34find out about that systemic risk and
2:36maybe protect themselves from it. And
2:38Andrew Bailey, whilst already being
2:40governor of the Bank of England, is also
2:42heading up the Financial Stability Board
2:44as chairman, whose entire purpose is to
2:47warn governments around the world about
2:49financial crises before they happen. And
2:51that's exactly what he's doing right now
2:54regarding AI. So, let's have a look at
2:56what he's actually saying.
2:59Andrew Bailey, governor of the Bank of
3:00England, has warned of a severe downturn
3:03in global stock markets if the AI bubble
3:05burst. In a letter to G20 finance
3:08ministers, Bailey raised concerns over
3:10the economic failure or fallout if the
3:12debt-fueled AI investment boom begins to
3:14unravel. He warned the soaring levels of
3:16debt that have been used to fund AI
3:17could amplify a future market
3:19correction. If the valuation of AI
3:21companies start to plummet, then
3:22investors face the prospect of losing
3:24trillions of dollars overnight. This
3:26could trigger a dangerous chain reaction
3:28if they are forced to sell other assets.
3:30Mr. Bailey said the risk was compounded
3:32by investors borrowing huge sums to
3:34invest in a small number of AI companies
3:36and data center providers, pushing up
3:38their valuations to astronomical levels.
3:41Bailey warned that stretched asset
3:43valuations in AI are one factor that
3:45could trigger a sharp economic slump.
3:48Quote, "Markets remain vulnerable to a
3:50potentially disorderly correction that
3:51could spread across borders. The issue
3:53is not simply that investors are
3:55borrowing more, but but that leverage is
3:57interacting with high valuations and
4:00high market concentration.
4:02He also noted how current economic risks
4:05are based on fragilities in sovereign
4:07debt markets that they're higher on.
4:09This is in reference to a recent rise in
4:11global borrowing costs led by the US
4:12after its debt pile crossed 40 trillion
4:15US dollars for the first time. Bailey
4:17warned some hedge funds are not only
4:19exposed to AI investment, but also
4:21government debt. In addition, a growing
4:23footprint of leveraged entities like
4:25hedge funds in equity markets, which are
4:27exposed to sovereign debt, increasing
4:29the scope for contagion risks. So,
4:32there's nothing really groundbreaking
4:33there with what Bailey has actually
4:35said. If you followed my channel, for
4:37instance, before, you've certainly heard
4:39those points raised many, many times.
4:41The important thing here is that someone
4:43in his position has actually come out
4:45and said it. We can all see the writing
4:48on the wall. Nvidia guaranteeing 500
4:51billion US dollars worth of debt taken
4:53out by its own customers so that they
4:55can then buy chips from Nvidia. That is
4:58so obviously a canary in the coal mine.
5:00And previously troubled and poorly run
5:02asset managers like Blue Owl Capital,
5:04yes, that Blue Owl Capital, who just
5:06this year saw their private credit arm
5:08collapse spectacularly in a
5:10multi-billion dollar collapse, well,
5:13they are now going headfirst into
5:14AI-driven private credit. Again, a
5:17massive and glaring obvious sign of a
5:19bubble within the AI sector.
5:21Equally, the risk of rising yields
5:24around the world, but in particular for
5:26sovereign bonds, is something you've no
5:27doubt heard about before Andrew Bailey
5:30just raised it. Gilt yields here in the
5:32UK, where I live, they're sky-high.
5:34They're almost touching 6% for the
5:3630-year, and the US has seen its 30-year
5:38Treasury yield rise above 5% despite
5:41huge, monstrous efforts by the
5:43government to bring it down. So, it
5:45doesn't take a genius to recognize that
5:47running massive government deficits well
5:49above the rate of growth within the
5:51economy itself is a bad idea if you do
5:53it for decades upon decades upon decades
5:56for the financial stability of an
5:57economy. But it does take actually quite
6:00a brave central banker to actually say
6:02all of that out loud to risk the
6:05backlash from the media, from the
6:06markets, from politicians and from all
6:08the other financiers in positions of
6:10authority for threatening the stability
6:12of the system by questioning the data of
6:15the system.
6:16And that's, it seems to me at least, is
6:18exactly what Andrew Bailey is thinking
6:21about what comes next. He's chair of the
6:23Financial Stability Board. This
6:25organization basically only exists
6:27because regulators before the financial
6:29crisis of 2008, they were too reactive,
6:32they were too passive, and they would
6:33only really pay attention to crises
6:35after they emerged, and that led to the
6:38largest global economic crash since the
6:41Great Depression. And the Financial
6:43Stability Board, they were created to
6:45find the problems before they explode,
6:47to draw attention to them before it
6:49turns into a collapse, and to warn
6:51governments so they can try to diffuse
6:52the bombs before they actually go off.
6:55Bailey, in my mind, doesn't want to be
6:57remembered like Jerome Powell is after
6:592022 and the inflation spiral where he
7:02just refused to hike interest rates. As
7:04a man in a position of authority who
7:06buried his head in the sand because he
7:08didn't have the guts to call a spade a
7:09spade, and so Bailey is speaking out so
7:12he doesn't end up like Powell.
7:15Now Bailey has also mentioned one other
7:17thing, which is growing in traction, but
7:19it isn't quite the same as the usual
7:21risks for an AI or a sovereign debt
7:24bubble popping.
7:26The threats that frontier AI models pose
7:29to cybersecurity is increasing the risk
7:31of a market meltdown, the head of the
7:33world's financial stability watchdog has
7:35warned, calling for more countries to
7:37introduce controls on the technology. In
7:39a letter to G20 finance ministers and
7:41central bank governors, Andrew Bailey
7:43said financial service companies and
7:45technology groups must prepare for more
7:47severe scenarios involving simultaneous
7:50disruption across multiple firms or
7:52shared technology dependencies. These
7:55fears intensified following a series of
7:57recent incidents in which the flagship
7:59models being tested by Anthropic and
8:01Open AI went rogue hacking into external
8:04organizations, creating fake identities
8:06to deceive people who were running the
8:08tests.
8:09Bailey said in his letter, AI cyber
8:11risks were adding to existing
8:13vulnerabilities in the financial system,
8:15urging more countries to take quote
8:17appropriate steps to control the release
8:18of new frontier AI models. Bailey
8:20appears to be trying to convince the US
8:23to reconsider its hands-off approach to
8:25regulating AI. Recent developments have
8:27also highlighted to me that many
8:29jurisdictions do not have the protocols
8:31in place to manage the development,
8:33release, and deployment of advanced
8:35frontier AI models, heightening risks
8:37for the financial sector and beyond.
8:39Again, Bailey, he isn't the first person
8:42to express worry about unregulated AIs
8:45and data breaches or rogue models
8:47hacking financial systems, but he is the
8:49first man with this sort of authority to
8:51say all of this out loud, to point out
8:54how a rogue AI could be the cause of the
8:56bubble collapsing in a very dangerous
8:58way. As for the actual potential ways it
9:01could happen, well, I'll leave that
9:02speculation to those who have a deeper
9:04knowledge of AI, cyber attacks to to
9:07theft and all the like, but it doesn't
9:08take a crazy imagination to conjure up
9:11some kind of AI breaking into central
9:13banks' computers, changing the federal
9:16funds rate, changing the base rates for
9:17interests in in across the Eurozone, or
9:20adjusting a bank's method for
9:21quantifying liabilities, so it goes over
9:23its capital adequacy requirements and
9:25ends up with a bank run, or myriad other
9:27things that could cause a financial
9:29crisis than an AI could run.
9:32Now, if there's a specific topic you'd
9:34like me to cover tomorrow, then leave a
9:35comment down below in the description.
9:37Or if you just want to stay up-to-date
9:38on the financial news the legacy media
9:40won't show you, then subscribe to this
9:41channel, like and comment under this
9:43video so my next video show up for you
9:44on the algorithm. Or you can watch some
9:46of my other videos by clicking the
9:48button that's on screen right now.