As traders continue to make millions from their mother’s basements by YOLOing Nvidia (NASDAQ:NVDA) calls, a lurking threat casts a long shadow over the global financial landscape. I have a lot of fun joking about the mania in NVDA stock on social media, but the truth is none of this will ultimately matter if I’m right that there is a very real and present danger of a credit event in September.
So, let’s not lose our focus.
$NVDA is about to become a source of liquidity.
A credit event is coming.
— Michael A. Gayed, CFA (@leadlagreport) August 24, 2023
In an attempt to sustain economic stability, central institutions such as the Bank of Japan (BoJ) and the People’s Bank of China (PBoC) have been performing a delicate balancing act. These institutions are striving to maintain a hawkish stance to keep inflation under control, while simultaneously adopting a dovish approach to avoid triggering economic instability.
Japan, China Signal Stock Market Risk
The Bank of Japan, the last holdout against tightening monetary policy, has recently taken a minor step toward this end. The central bank has modified its yield curve control policy, allowing a rise in the 10-year Japanese Government Bond (JGB) yield up to 1%. This move has been interpreted as an early sign of a future policy tweak, indicative of the mounting strain on the bond market.
The PBoC has also made some adjustments to address its country’s rapidly decelerating economy. It has recently surprised the market with a 15-basis-point cut on the 1-year medium-term lending facility rate, a significant move by its standards. This action indicates that the Chinese government is aware of the growing economic challenges and is likely to implement further stimulus measures.
In the U.S., the Federal Reserve’s swift and sharp interest rate hikes have posed challenges for banks and businesses. The burden of higher accumulated debt and escalating interest rates has put immense pressure on the bond market. The situation worsened when Fitch downgraded the U.S. government’s credit rating from AAA to AA+. This downgrade, however, did not provoke a significant market reaction, unlike the U.S. downgrade in 2011.
At least not yet.
The debt crisis is a very real and looming threat. Companies that borrowed money by issuing notes with maturities of 5 years or less will soon have to refinance their debt at much higher interest rates. This situation is likely to become progressively worse over the next few quarters.
While these economic threats loom large, the global fixation on NVDA stock continues unabated. Nvidia’s progress in AI and its consequent market rally have captured the world’s attention. The collective fascination with Nvidia, however, may be diverting focus from the imminent credit event.
The Bottom Line on NVDA Stock
Bottom line? The rise of Nvidia and the concurrent threats of credit crises present a paradoxical scenario.
Could AI change the world? Certainly. But if there’s anything I know about markets, it’s that there is always a distraction that captivates investors just as something much more consequential is about to take place.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
