Bernstein sounded the alarm: Overflow of liquidity is creating a “full-blown bubble”, and AI is only the tip of the iceberg

The Zhitong Finance App learned that Richard Bernstein Consulting (RBA) issued a warning saying that excess liquidity is driving asset prices far beyond fundamental support. Currently, the market bubble has spread beyond artificial intelligence (AI), forming a “full-scale carnival.” Mike Kantopoulos, the company's Deputy Chief Investment Officer, recently stated bluntly: “We are in some kind of 'all-out bubble' right now. It's not just AI — cryptocurrencies, memes, special purpose acquisition companies (SPACs), investment-grade bonds, high-yield bonds, none of which have been spared.”

This veteran with 25 years of market experience and a former head of high-yield strategy at Bank of America points the finger at loose monetary and fiscal policies, believing that they have led to this valuation frenzy that deviates from fundamentals.

Kantopoulos specifically pointed out that the AI boom is particularly worrying for credit investors. If the AI boom succeeds, bondholders will not be able to share in its excess profits; if it fails, investors will bear the losses.

Currently, the market is increasingly watching tech giants commit hundreds of billions of dollars to AI infrastructure — most of which will be raised through the US debt market. According to the data, the capital expenditure of Microsoft, Alphabet, Amazon, and Meta is expected to increase by 34% over the next year, reaching about US$440 billion.

“The technology sector will decline somewhat this year,” Kantopoulos questioned. “What are investors actually seeing in technology bonds that are willing to provide financing for up to 40 years for a technology that may become obsolete in five to ten years?”

Currently, RBA, which uses exchange-traded funds (ETFs) to invest across asset classes, has completely withdrawn from the corporate bond market. A year ago, it was overrated in this field.

“When the spread falls below 90 basis points, the relative value proposition no longer holds true for us,” Kantopoulos explained. As of Wednesday, the US high-grade credit risk premium had risen to 78 basis points, and has remained below 90 basis points since May last year.

Kantopoulos warned that if the pace or magnitude of the Fed's interest rate cuts falls short of market expectations, credit spreads may widen further this year. Furthermore, the slowdown in economic growth that exceeds expectations is another major risk.

As interest spreads on corporate bonds are already at a meager level, the RBA is instead optimistic about the investment value of mortgage certificates (CLO), mortgage-backed securities (MBS), high-grade variable interest rate debt, and European stocks.” “Nothing is more attractive than high-quality European stocks,” Kantopoulos said. “There is fiscal stimulus, monetary policy is also quite supportive, and profit growth is accelerating.”