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As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insu

• skohan 2mo ago
  Couldn't it be a problem given the concentration of the S&P in these companies? At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?
  • tyleo 2mo ago
    It’s an interesting thought. The growth is so extreme that if the S&P 500 fell 50% today it would reach levels last seen in 2022. Given that the timespan is so short, I’m honestly not sure it would be as bad for 401ks as people expect unless all of your investment was concentrated in the last 4 years. I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most people just retire at a certain age instead with risk spread across decades.
    • Imustaskforhelp 2mo ago
      During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era) It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic. I do understand what you are talking about and overall in long term, perhaps things flatten out but atleast speaking financially so, its better to be on a smooth sailing road rather than insane ups and downs with retirement money if preferable. > I think most people just retire at a certain age instead with risk spread across decades. The issue in my opinion is with people near that certain age you mention and who retire in the time during boom just before bust. They would then get the 50% hit on their savings instantly with an recession/inflation/unemployment environment which in my opinion might be genuinely devastating. (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)
      • toomuchtodo 2mo ago
        > (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.) What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.
        • Marsymars 2mo ago
          > What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for. I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.
          • intrasight 2mo ago
            My homeowners insurance isn't "cost-effective" either but I still do it. I think the reason that investors don't is because they are greedy or irrational or both. That was the message that I got from a financial podcast I listened to a couple weeks ago anyway.
            • duzer65657 2mo ago
              investors are irrational but actually tend to go the other way - too risk adverse. I'm not sure what a "greedy" investor is, TBH.
              • intrasight 2mo ago
                Yeah "greedy" is not really the right word. What I meant was not properly managing.
    • MattGrommes 2mo ago
      One of the big issues with this is sequence of returns risk. If you retire and rely on your portfolio but the market dives for a year or two right after you leave the workforce, your total portfolio value is screwed because you were selling at a low point.
      • rwmj 2mo ago
        Which is why you keep 3-5 years of spending money in cash (or a bond ladder if you want to be fancy).
        • duzer65657 2mo ago
          most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.
          • hdgvhicv 2mo ago
            People return with less than 4 years expenses in retirement funds Surely you need about 20 years?
            • budman1 2mo ago
              Social Security, my friend. And there are still some pensions out there.
          • rwmj 2mo ago
            Sure, but we're not talking about people who have no savings. FIRE people have huge investment portfolios while being frugal with their spending, and understand the risk of keeping 5-10% of their total net worth in cash equivalents (not dissimilar to having insurance).
            • deleted 2mo ago
              [deleted]
    • zer00eyz 2mo ago
      Inherited IRA's, if you aren't the spouse, have some pretty strict draw down rules. As the boomers die off - if they have these accounts - their kids are quickly going to be forced to liquidate them over the course of 10 years. With some of them having to sell a chunk annually.
  • swarnie 2mo ago
    I'm not familiar with 401k rules but presumably they get a choice of markets and products? If one is over concentrated its easily avoided.
    • loudmax 2mo ago
      The employer selects a financial company to manage the 401k. When you switch jobs, you can roll the 401k from the previous employer into the new one, or into an IRA (Individual Retirement Account). Usually the financial services company will offer several options: more aggressive/high risk, or less aggressive/lower risk. Most people will just go with whatever is the default option. So much of the American S&P 500 is dominated by handful of companies that the risk is not that easy to avoid. If or when the AI bubble pops, it's going to take down a lot of the economy with it. You can direct your retirement savings into the lowest yield/lowest risk assets offered by the firm, but you'll forego whatever growth happens in the mean time. Will the bubble pop next week? Next month? Next year? Who knows. Timing the market is incredibly difficult. There's a famous quote, attributed (perhaps apocryphally) to John Maynard Keynes: "The market can remain irrational longer than you can remain solvent."
      • TitaRusell 2mo ago
        The whole idea of a pension fund is that you don't need to time the system it is the system. Like my country pension scheme. It went through ups and downs for a hundred years but has always come on top. All you need is a long horizon and a trillion dollars and you basically can't lose.
    • skohan 2mo ago
      The problem some have pointed out is that these companies are such a huge portion of the market right now. The sound advice for the past decades has been, just invest in a low-cost ETF tracking the S&P instead of picking stocks to minimize risk and invest in the market broadly. So a huge number of people have done that, believing they're diversified, while tech makes up 40% of the index. Yes you could sell your S&P and find things to invest in least likely to be impacted by a potential bubble, but your average 9-5'er with automated contributions to their 401k is probably not sophisticated enough to do that. And that's assuming only these companies would be affected if there was a massive draw-down in tech/AI related stocks. We haven't really seen a situation like this before, so it's not easy to predict what effects there might be in the broader economy.
  • riffraff 2mo ago
    NVidia makes up 7.5% of the SP500. If it lost 50%, it would be a 3% loss for the index. The concentration is bad, but it would not cause a drop of 50% retirement funds by itself. If you take an all world index, it's even less. Still, if NVidia lost 50% of their market share, we would probably see a big collapse of the stock market. EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".
    • bdangubic 2mo ago
      how are they not “mostly AI”?
      • riffraff 2mo ago
        Amazon, Microsoft, Meta, Alphabet sell a lot more things than AI. They were huge before and would still be huge after. Do you think iphones and windows™ will stop selling once the ai bubble pops?
    • conartist6 2mo ago
      Idunno man. Am I the only one that remembers the day the first DeepSeek model came out? It wasn't like, "Nvidia took a hit and everyone else was fine". It was more like, "One or two companies were fine, and ALL others took a hit"
    • kipchak 2mo ago
      Regarding unprecedented concentration, wasn't the nifty fifty era comparable for the top 10, about 40%?
      • riffraff 2mo ago
        I frankly don't know, the "unprecedented" is something I read in articles but haven't actually investigated.
        • kipchak 2mo ago
  • senshan 2mo ago
    For those who stick to a meaningful asset allocation (e.g. 60/40, 80/20, etc), this does not pose significant problem -- they would not be buying much stock in the last 3 years. Instead, they would be buying mostly fixed-income. Probably mostly in 401k/IRA accounts.
    • mint5 2mo ago
      But if their debt goes bad, isn’t that debt the very bonds that make up the other part of those asset allocations?
      • senshan 2mo ago
        Typical total bond market fund like BND is ~70% in USG -- pretty solid: https://investor.vanguard.com/investment-products/etfs/profile/bnd#portfolio-composition https://investor.vanguard.com/investment-products/etfs/profi...
  • anthonypasq 2mo ago
    retirees arent suppose to have their active retirement funds in stocks dude. Any financial advisor with a brain would not make such a ridiculous asset allocation error.
    • kipchak 2mo ago
      Regardless of whether it's a good idea, it absolutely happens and as a result would impact retirees, both in individually managed accounts and target date funds. For example here 70+ are 45% equity.[1] TROW retirement 2020 funds are about 50% stock, for example, and only decrease to a floor of 30%. https://workplace.vanguard.com/content/dam/inst/iig-transformation/insights/pdf/2025/has/2025_How_America_Saves.pdf https://workplace.vanguard.com/content/dam/inst/iig-transfor... (page 78)
  • noelsusman 2mo ago
    Retirees relying on short term equity returns to cover expenses only have themselves to blame.
  • minimaltom 2mo ago
    Even if theres a massive drawdown it will recover in the medium term (and in the short term is a great buying opportunity). For the people who are close/early to retirement and can't do that, well, they need to manage sequence of returns risk. Edit: I think some ppl might interpret this as me being bullish on the SP500. I'm not, I'm bullish on everything evens out and returns to the mean.
  • hualapais 2mo ago
    I suggest looking into “EQL”, or better yet, just replicating its index by taking a position in the 11 XL* sector funds from SPDR, allocating equal weighting to each. One will end up with one’s equities equal weighted by sector and with plenty of large cap exposure, as opposed to the pronounced mid-cap tilt found in whole market equal-weight strategies. Personally, I drop the financial sector entirely (Thomistic prohibitions on usury) which leaves an even 10 funds which is easy to allocate mentally and in practice. For example, assuming a 60/40 allocation where one is holding the lion’s share in equities and the remainder in bonds (I substitute with a combination of gold, crypto, cash, and Swiss Franc here), one would allocate as follows: XLC 6% XLY 6% XLP 6% XLE 6% XLV 6% XLI 6% XLB 6% XLK 6% XLU 6% XLRE 6% (Note that XLF is consciously not taken as a position here, decide if it’s right for you. The Mortgate REITs which would make XLRE problematic are in XLF per the sector selection rules) The remaining 40% is bonded debt if you are fine with usury, or some sort of asset negatively or neutrally correlated to equities.
    • rocho 2mo ago
      Why do you consider bonds usury?
      • michaelt 2mo ago
        In many historical societies, religious prohibitions on usury meant the charging of interest of any kind. Jump in a time machine to 1515 and ask Martin Luther, or to 1260 and ask Thomas Aquinas, they'd tell you it's sinful. And in the present age, a fair number of Islamic folk consider interest against their religion's rules. So there's a Halal finance industry where, for example, you can get a "murabahah contract" where the bank buys a house, then sells the house to you at a higher price, while allowing you to pay them in monthly instalments.
        • Exoristos 2mo ago
          Older than any of those: "Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest" (Deut 23.20 JPS Tanakh).
  • MikeNotThePope 2mo ago
    I don’t think concentration risk is itself overly concerning. The nature of a market cap weighted index means it will always be heavy on whatever is currently trending. You’ll certainly be hurting if your plan is to retire at the top of the market with just enough, as the inevitable downturn will hammer your portfolio down into not enough. So invest until you have enough to handle volatility or a lost decade with a dip and slow recovery.
  • epolanski 2mo ago
    There is no data showing that high concentration is bad in an index. No correlation with future returns. On the other hand the world is leveraged to insane levels not seen since world wars or global recessions. At the same time yields are low while inflation is high. There is definitely a high level of risk in the financial markets. A risk nobody, especially politicians, want to look at, because it would unavoidably lead to some major pains, so procrastinating until it's unavoidable seems the way to go.
  • magicbook 2mo ago
    Isn't that considered a likely case? I always assume that my sp500 holdings are worth roughly half of what they are (and base retirement and spending decisions on that number). and most financial advisors will tell you future returns of sp500 for 10 years out will barely keep pace with inflation, if that.
  • fsckboy 2mo ago
    >How would it affect retirees if they dropped 40-50%, likely taking the market with them? a drop of 40-50% in the S&P 500!? That didn't even happen in the market crash of 1929. It would lead to unemployment and breadlines for the majority of the population, and retirees would get in line like everybody else. Making income from your savings requires a productive economy; bonds are not the answer because bonds also stop getting paid, and even govt bonds would be erased by inflation. it's just not a scenario that should be on your radar, the chance is tiny, and the result would be completely non-linear. if you tried to hedge yourself against that, not only would you fail (it's simply out of your control, like an earthquake or tornado), you also wouldn't make any income in good times, and most times are good and it's sensible to plan for that retirement.
    • kbcool 2mo ago
      The S&P 500 has dropped over 40% multiple times including 1929. It did it in the 70s, 2000 and 2008/9. The COVID crash nearly hit those levels also
• dzonga 2mo ago
  bingo - if the firms holding the debt keep holding the debt & the debt doesn't get passed to other entities - the system will be fine. if say meta owes 720Bn, they wouldn't have trouble paying that back in 10 years. this doesn't take away the fact that 'a.i' right now is a bubble.
• aftbit 2mo ago
  I disagree - high leverage inherently makes systems less stable.
  • senshan 2mo ago
    You probably meant to say that practically, high leverage tends to leak into companies of public interest. For example, when high net worth individuals start trimming their private credit holdings, which eventually end up with insurers. That is why the regulators have to watch carefully that it does not happen.
    • aftbit 2mo ago
      No, I meant that having a lot of debt puts you in a position to be more vulnerable to any kind of negative outcome. Intuitively, this seems to hold true across the spectrum from the personal level to the government level. If a person has a lot of debt and no savings, and they lose their job, then they will find themselves in trouble a lot faster than someone who owns their home and car and has 6 months in a savings account. If a company has a lot of debt, they might find themselves in trouble with credit rating agencies as soon as they have a bad quarter. Or they might have cashflow issues if rates increase. Both of these can lead to an accelerating negative feedback loop. Governments (at least those with fiscal independence) have a unique set of tools to work around this situation, but they too can struggle with high debt loads acting as a drag on future prosperity. Debt plays a critical societal role in allowing new production in advance of revenues, but it can also be a dangerous trap. These AI and tech companies are priced as if they are still running a capital-light, 0-marginal-cost SaaS business. That's no longer what's happening. This economic engine makes up a substantial amount of both the value and the growth in the American stock market. If there's a loss in confidence, high leverage will make things fall faster. This could be infectious. Not just the AI and tech companies, but the whole market might suffer.
• isoprophlex 2mo ago
  There is ZERO chance the modern oligo-kleptocracy isn't going to socialize the losses onto the little guy
  • shimman 2mo ago
    Yeah, hence all the talk about forcing "public" ownership. Becomes easier to justify a bailout when you create some legal fiction compelling the government to do so.
• guywithahat 2mo ago
  You say this as though every company doesn't take on debt, and all debt isn't a risk. I'm sure you have some much riskier debt than ChatGPT already in your portfolio, and interest rates are adjusted by relative as judged by the market. I'm sure some debt will fail, but certainly all of it won't, and while anything could cause a market crash saying "when these fail" holds a lot of incorrect assumptions.
• derf_ 2mo ago
  > When these fail, it will become everyone's problem. Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.
  • senshan 2mo ago
    Are you suggesting that holding private credit assets is relatively risk free? Equity is a risky asset, so equity being wiped out should not be a surprise to anyone, but life insurance and pension funds failures is indeed a public problem.
    • nickff 2mo ago
      There's a wide spectrum of 'private credit', and it varies from low-risk to quite high risk, depending on the debtor. In the case of "AI Companies", their debt is low-risk, but many are creating special-purpose-entities which will build and own some or all of their newer datacenters. Those datacenter companies are issuing a great deal of somewhat risky debt; with the exact level of risk depending on the off-take agreement.
  • jcfrei 2mo ago
    That's an overgeneralization and haircuts for debtors are common - even when a positive equity value remains.
• jgalt212 2mo ago
  > As long as this debt does not make it into life insurance and pension funds, we are fine. I think for small to even large numbers you are correct, but given how yuge this debt amount is a broad-based default will probably cause a contagion. I will not predict how far and wide.
• mschuster91 2mo ago
  > As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem. Three things: 1) at least SpaceX is already in pension funds "thanks" to NASDAQ and MSCI relaxing their rules. Everyone who invests in NASDAQ or in MSCI World has SpaceX exposure, and assuming the bonanza lasts for 11 more months, so will everyone who invests into S&P 500. In addition NVIDIA, Google, Microsoft, Oracle and Amazon all have been in pretty much every investor's / pension fund depots. No matter what, everyone is going to get fucked when the party crashes, and it will make 2007 look harmless by comparison. 2) The debt of the AI companies is bad enough, but there's all the downstream credit as well, chiefly construction companies and public utilities that are undertaking absurd amounts of buildout. When the party crashes and the demand stops, there will be a lot of construction companies and possibly even a few large utility companies that will be unable to service their debt (because no datacenter means no income) or have to hike rates even more than they already are. 3) All this debt and speculation unwinding will cause an economic downturn. Most of Europe already is in or near recession territory, and the US would be in a recession if it weren't for the wash trading and circular investments artificially propping up the GDP. But unfortunately, with the exception of infamously austere Germany, everyone else has already fired all the guns during 2007ff and Covid, and all the ZIRP money never got slowly deflated out of the market, which means this time there will be no government help possible, it will be a hard crash. No way out of that one.
• d5lt5 2mo ago
  > As long as this debt does not make it into life insurance and pension funds, we are fine. Already happened: https://finance.yahoo.com/markets/stocks/articles/michael-burry-doubles-down-nvidia-223300296.html https://finance.yahoo.com/markets/stocks/articles/michael-bu...
  • baron816 2mo ago
    Yes of course life insurance and pension funds are going to buy this debt. This is the highest quality debt that's out there. If you don't want life insurance and pension funds to buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general.
    • hvb2 2mo ago
      > buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general Uh, no? Ignoring the rating, I think there are plenty of other bonds to be found that are less risky. Dutch government bonds just to name one? The yield wont be the same but that's probably a good indicator?
    • AnimalMuppet 2mo ago
      OK, wait a minute. Elsewhere in this discussion, people are saying that only a few of these AI companies are going to survive. For stocks, that can still be a reasonable investment - low odds, but still a positive expectation value - but for bonds, it's terrible. You're paying me single-digit interest when there's only a 20% chance that you live long enough to give me my principle back? Get outta here. Literally nobody should be investing in such bonds.
      • muellero 2mo ago
        If big tech bonds are a terrible deal for investors at 8%, then Google or OpenAI is getting a screaming deal by raising debt at that rate. Saying nobody should be investing in these bonds is very similar to saying that big tech should raise more debt.
• duxup 2mo ago
  It impacts investment or lack of it in other places. I had some visibility to a company trying to sell and was told that if it wasn’t AI there just wasn’t much money out there.
• BrenBarn 2mo ago
  We are definitely not fine. The mere fact that this amount of money is flowing to these operations is already a problem.