Market is showing signs of a dangerous debt bubble with losses that could be ‘contagious’, says economist

Getty Images; Alyssa Powell/BI

• The market is at risk of creating a damaging debt bubble, potentially spreading losses across the financial sector.

• Economist Dambisa Moyo warns of overvalued stocks driven by enthusiasm for artificial intelligence.

• Moyo highlights the danger of highly leveraged and unproductive assets, similar to the 2008 crisis.

The stock market may be hosting one of the most damaging types of debt bubbles, with losses at risk of spreading across the financial sector, according to an economist and investment veteran.

In a recent opinion piece for Syndicate ProjectDambisa Moyo — an economist, Goldman Sachs alumnus and current director of Versaca Investments — highlighted growing fears that the stock market is becoming overvalued. Wall Street’s enthusiasm for artificial intelligence made huge gains for mega cap tech stocks this yeartaking all three benchmark stock indexes to new records.

“The signs of bubbles emerging in financial markets are clear to see,” Moyo wrote. “Such trends certainly justify concerns about new stock market bubbles.”

But even more worrying is that the U.S. may be seeing one of the most problematic types of bubbles, fueled by highly borrowed and “unproductive” assets, Moyo said. Such assets pose more harm to the economy than productive assets, or assets financed with cash or equity, where losses are more contained for direct investors.

The “best” example of this type of bubble is the subprime mortgage crisisshe added, as housing oversupply and risky lending practices collided and caused property prices to fall by a third.

Most economists don’t see a scenario like that happening today, thanks to tighter lending standards in the banking sector. But many companies that appear to be heavily indebted and unproductive appear to be financed in the shadow banking sector, Moyo said, where there is little regulatory oversight of debt taking.

The crisis is already deepening among some of the most indebted and unprofitable companies. Business bankruptcies are now rising at the fastest rate since the pandemicaccording to data from S&P Global, with bankruptcy filings rising to 346 in June.

Losses from troubled companies also risk spilling over into other areas of the market, Moyo added.

“While a loss suffered by someone who has used accumulated savings will have only a limited effect on the broader economy, losses suffered on ‘borrowed’ money, especially with high leverage, can be contagious. A system with low visibility into the sources and forms of capital underlying many investments is risky. Greater scrutiny of unproductive and leveraged assets is crucial to avoiding a financial crisis,” she said.

The story continues

Other Wall Street experts have expressed concerns about actions it’s Photoshop corporate debtespecially considering how high valuations are in the market. According to one valuation metric, stocks appear to be more overvalued ever, even surpassing the levels seen in 1929.

Read the original article at Business Insider

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