The eerie clue Wall Street thinks stocks are about to implode - as the world's most powerful banker Jamie Dimon quietly dusts off ‘Big Short’ playbook
The toxic assets that helped crash the economy in 2008 are roaring back, and this time, Wall Street is offering them to bet on an AI crash.
Giant tech companies are building huge AI data centers across the US as fast as they can, and they have taken out a mind-blowing amount of debt to fund the expansion - more than $120 billion in 2025 alone.
But as anyone with a huge credit card balance knows, loads of debt can mean loads of problems.
Wall Street is deeply invested in profiting from AI’s mega expansion, but at the same time, investors are getting nervous about the sustainability of the industry.
In response, investment bank JPMorgan has quietly begun offering big institutional clients exotic investment vehicles to help them hedge their bets.
The assets are designed to make money when debt goes bad and markets blow up - so-called ‘credit default swaps’ or CDS.
‘This signals that doubts about the sustainability of the AI bubble are beginning to surface,’ wrote Tomoya Asakura, president at SBI Global Asset Management, on X.
Sound familiar? If you ever saw The Big Short, you will remember Margo Robbie sipping on champagne in a hot tub while explaining how these exotic derivative contracts played a central role in blowing up the global economy in 2008.
In The Big Short, Margot Robbie explained how credit default swaps worked while sipping on champagne in a hot tub
JPMorgan chairman and chief executive officer Jamie Dimon led the company through the wreckage of the 2008 crash
Charles-Henry Monchau, chief investment officer of Geneva, Switzerland-based investment firm Syz Group
Before the crash of 2008, Warren Buffett famously described derivatives like these as ‘financial weapons of mass destruction,’ and it remains an open question whether they remain as lethal today as they were nearly 20 years ago.
In 2008, Buffett’s famous quip about ‘weapons of mass destruction’ was borne out by markets.
The spread of derivatives throughout the global financial system - and their subsequent failure to deliver on their promises - acted as gasoline poured on a wildfire.
Memories of that experience haven’t stopped JP Morgan from offering clients similar tools to bet against five companies deeply invested in the AI data center buildout, including Google, Amazon, Meta, Microsoft and Oracle.
Shares of Oracle have lost around 50 percent of their value since last September, the last time they hit an all-time high. Microsoft is down 24 percent and Meta is off 15 percent over a similar period.
Bloomberg reported that the investment bank is selling CDS derivative contracts to insure against a downturn in any one of these companies at a price of millions of dollars each.
'The availability of [CDS] does not create risk, but it does mean that the market will reprice it more rapidly and more visibly than it otherwise would,' Charles-Henry Monchau, chief investment officer of Geneva, Switzerland-based investment firm Syz Group, told the Daily Mail.
Among the problems the companies face are fears that AI products sold by them and related companies will not generate sufficient revenue to pay for the massive debt load, analysts say.
In 2002, Warren Buffett famously called derivatives 'financial weapons of mass destruction'
Economist Michael Szanto warns Alphabet and Meta could face a avalanche of extremely costly lawsuits
'Today the major hyperscalers have enormous amounts of cash and are highly profitable, so their solvency is not at all in doubt,' economist Michael Szanto told the Daily Mail.
'Still Meta’s losses in two major liability cases over internet addiction raise fears that Alphabet and Meta could face an avalanche of extremely costly lawsuits,' said Szanto.
Monchau warns that if 'AI monetization disappoints' financial markets, the consequences will be felt not only in the stock market, but also in a range of debt- and fixed-income assets, making hedging essential.
Back in 2012, JPMorgan chief executive officer Jamie Dimon called these kinds of derivatives 'stupid' in the wake of a trading scandal.
During the so-called 'London Whale' trading loss, Dimon admitted that the CDS contracts JPMorgan had used as a hedge did not work as intended.
'The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought,' he said in 2012. 'There were many errors, sloppiness and bad judgment."'
Steve Eisman has warned not to be lulled into complacency regarding private credit markets
Dimon admitted that the hedge had 'morphed into something that, rather than protect the firm, created new and potentially larger risk.'
These kinds of derivative contracts - taken out on single companies - have gone from almost non-existent a year ago to some of the most actively traded contracts in the US market, according to Depository Trust & Clearing Corp.
Meanwhile, the investor whose story first inspired The Big Short, Michael Burry, has widely publicized his bets against the AI industry, specifically the companies Palantir and Nvidia.
Since taking out his trades against the two firms last fall, shares of both companies are down by double digits.
Fellow Big Short alumnus Steve Eisman has warned that private credit markets have been strong for over a decade, but that won't necessarily last.
'You can lever yourself up to your eyeballs as long as nothing bad happens,' cautioned Eisman.
