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Happy Friday! Don’t you think Korea is a curious peninsula? The most extreme experiment in communism lives next door to what is arguably the world's most committed form of capitalism. But in Seoul, regulators have realised things might have gone a touch far.

Earlier this year South Korea launched single-stock leveraged ETFs, and within two months they made up more than 40% of daily trading volume, as investors gambled all the money they had, and some that they didn’t. The KOSPI became more volatile than Bitcoin. New rules designed to put the cat back in the bag mean traders must sit three hours of classes and spend five days on a simulator before buying levered products. L-plates for leverage.

In-depth: Nvidia wants to turn computing power into an asset class and has enlisted six of Wall Street's biggest names to raise capital secured against its own chips.
Newsbites: Britain beats forecasts, Berkshire buys shares, and Norway fears all its money could disappear.
PensionCraft News: Passive investing is changing, record corporate earnings, and can you spend more early in retirement?

IN-DEPTH

Reinventing the Wheel:
Nvidia's Debt Machine

Pick any object whatsoever and I guarantee you that somewhere a banker has found a way to lend against it.

In Italy, there is a bank — a proper one, with a credit rating, regulators and everything — that has spent the last seventy years accepting cheese as collateral. Credito Emiliano holds more than half a million wheels of Parmigiano Reggiano — worth €300 million — in climate-controlled vaults, advancing dairy farmers 60–80% of their value.

Yes, it’s the most Italian thing imaginable. But it does make sense. Parmigiano must age for up to three years before it can be sold, and farmers need cash now. Plus, if you think about it, a wheel of cheese is ideal collateral — a gradually appreciating asset that can be stored, seized and, in extremis, eaten.

The bank is yet to lose a single euro on these loans — if producers default the bank simply sells the cheese at maturity. What can be done for cheese can be done for chips. Whether it should is a different question.

Cheesy chips

The initial wave of data centre construction was paid for the old-fashioned way: the hyperscalers wrote cheques from their own enormous piles of cash. But as the cheques have grown faster than the cash, the money men have had to get more creative. Structures have been carefully engineered to raise billions in debt yet somehow show up on nobody's balance sheet in particular.

This week, Nvidia unveiled the most ambitious contraption yet. The chipmaker signed memorandums of understanding with six financial giants — Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR — to help drum up over $500 billion of other people's money for AI infrastructure. Each firm will run its own AI financing platform, which Nvidia CEO Jensen Huang says will turn compute into "an investable asset class."

The plumbing works like this. A special purpose vehicle — a company that exists only on paper — borrows money from bond investors, spends it on Nvidia hardware, and rents the resulting computing power out to Nvidia's customers.

What if the customer stops paying? Handily, the debt is collateralised by… the chips themselves. What’s the problem? Isn't this just like the wheels of cheese? Not quite.

A wheel of Parmigiano spends its years in the vault getting tastier and more valuable. A chip starts depreciating the moment it leaves the factory. And should the lender ever need to sell, the two markets behave very differently. There is a bottomless supply of pasta in need of a topping, whereas the market for second-hand AI chips is thin, opaque and subject to export restrictions.

Wrong whey risk

To be fair to Nvidia, chips that rolled out of the factory in 2020 are still out there earning their keep, six years into a lifetime that was supposed to last three. American Compute, which has analysed secondary-market transactions, reckons a GPU's useful life can stretch to eight years. (Then again, its business is selling insurance on the residual value of GPUs. No surprise that the barber thinks you need a haircut.)

And for anyone still nervous about what a five-year-old chip will fetch, Nvidia has an answer for that, too. The company will sweeten some deals by standing behind the resale value of the chips — on up to a quarter of a deal — reassuring bondholders that they won’t be left holding worthless silicon.

But that introduces a new danger: correlation. Especially in a crisis.

On paper, Nvidia is the ideal underwriter of this risk. Nobody has better visibility of its product roadmap and the damage each new generation might do to the value of existing hardware. But if a competitor undercuts Nvidia, or the AI boom deflates, it would need to stump up the cash precisely when its sales are down, and used chips are going cheap.

Meanwhile, in Italy, nobody is planning to release a faster wheel of cheese next spring.

Wheel of fortune

None of which necessarily means it ends badly. BlackRock CEO Larry Fink calls this the “future of financial engineering”, likening it to the birth of mortgage-backed securities in the 1970s. (He meant the comparison as a compliment, rather than a reminder about the sins of 2008.)

So far the deal is doing exactly what it was designed to do. The arrival of outside money and independent eyes on every transaction has calmed credit market fears that Nvidia is using circular financing to inflate an AI bubble.

Still, half a trillion dollars now rests on assumptions about chip longevity, AI demand, and lease rates that are untested at this scale and correlated with each other in ways that only become obvious later.

Famed short-seller Jim Chanos, the man who predicted the collapse of Enron, is tweeting ominous things.

Regulators are aware of the risk. The Bank of England's latest Financial Stability Report flagged AI companies' accelerating use of credit markets and structured finance, while the Financial Stability Board notes that AI accounted for more than a third of private credit deals last year, up from 17% over the previous five.

Securitisation doesn't destroy risk; it relocates it. One step away from the balance sheet where it originated, and one step closer to yours. I know you aren’t going to buy an Nvidia-backed bond (are you?!), but your bond fund or pension scheme might.

And before you ask whether anywhere is still safe, I regret to inform you about Italy. Farmers can now pledge wheels of cheese on the blockchain, without moving them from their own cellars, doubling the bank's lending capacity. Financial innovation comes for us all in the end. Even the cheese.

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NEWSBITEs

The UK economy grew 0.4% in the second quarter, a respectable follow-up to Q1's 0.6%, with services up 0.5% while production stayed flat. June alone rose 0.3%, against forecasts of zero, as the ONS credited sunshine and World Cup fever. Maybe it was coming home after all?

US inflation eased to 3.4% in July, down from June's 3.5% and a second month of retreat from May's Iran-induced 4.2% peak. Core eased to 2.5%, with shelter still driving two-thirds of the monthly rise—leaving September's Fed meeting as a probable hold, with a one-third chance of a hike.

Intel raised $20bn in its first public share sale since listing in 1971. The deal was upsized from $15bn after drawing over $100bn in demand—quite the reversal for a firm that lavished $82bn on buybacks in the 2010s. The stock is up around 165% this year. Financial engineering out, actual engineering in.

Berkshire Hathaway turned net buyer of equities for the first time in 14 quarters. Greg Abel, eight months into the job Warren Buffett held for six decades, put roughly $20bn to work in Q2 and repurchased $4.5bn of Berkshire's own shares, up from a token $235m in Q1. The record $397.4bn cash mountain was whittled down to a paltry $365.5bn. Buffett’s MO is to patiently wait for a fat pitch; Abel came out swinging.

Norway's $2.3trn oil fund returned 11.5% in the second quarter, its best since 2020. The fund, which owns around 1.5% of all global stocks, saw its equity holdings gain 16% on strong performance from Asian tech. Yet CEO Nicolai Tangen warned the fund could vanish entirely in a crash, calling current conditions "abnormal". I guess that counts as hedging?