Is AI boom hiding growing US risks? Nomura warns dollar asset concentration leaves global markets vulnerable to AI shocks

Amid rising concerns over mounting government debt and US President Donald Trump’s policy flip-flops, Nomura argued that the AI boom is masking a growing American risk premium, leaving global markets vulnerable to an AI setback because of their heavy concentration in dollar assets.

In its latest special report, Nomura highlighted how the rest of the world’s exposure to US dollar assets has become so concentrated that an AI setback could trigger a depreciation in the dollar. Typically, investors subscribe to the TINA — “there is no alternative” — view when it comes to US dollar assets. However, Nomura challenges this assumption in its report.

The ratio of US net international investment position (NIIP) liabilities to the sum of all net creditor nations’ NIIP assets has surged to 80%, which the international brokerage believes marks a vivid measure of how concentrated the Rest of World (ROW) savings have been funnelled into USD investments. While noting that US NIIP liabilities increased and USD appreciated during the great financial crisis and pandemic, Nomura explained it is more plausible now for US NIIP liabilities to decrease.

How AI is masking US risk premium despite fading trust in Trump’s policies?

The US Federal Reserve has not achieved its inflation target for five years, its fiscal and current account deficits have swollen public debt and the net international investment position (NIIP) of liabilities, as shares of GDP, are near historic highs. International trust in US fiscal, trade and foreign policies and Fed independence has also eroded in the meantime. Nomura believes that all of these raise the question that in case trust in US policy is compromised, why are there no clear signs of de-risking from USD assets. “We believe the answer is AI. The US sits at the heart of the AI revolution, nowhere more so than in capital markets. US NIIP liabilities (i.e., the ROW’s holdings of USD assets) have ballooned because of net capital inflows and extraordinary capital gains from the AI-driven US equity boom,” it added.

In what marks a vivid sign of the concentration of the world's savings funneled into USD investments, Nomura calculated that the ratio of US NIIP liabilities to the sum of all ROW net creditor nations’ NIIP assets has surged to 80%. However, the $21.3 trillion pile of US NIIP liabilities is finally starting to exact a penalty, it added. After more than 20 years in surplus, net primary income, which includes net profits, dividends and interest, has flipped to deficits over the last two years. Just as net government interest payments have swelled beyond half the fiscal deficit, the same dynamic may now be starting to play out in the current account, should NIIP liabilities and UST yields keep climbing, the international brokerage said.

Can AI setback trigger sharp selloff in stock markets?

“We suspect that, with rich US equity valuations and weaker economic fundamentals, an AI setback would trigger a large US equity correction. Amplified by the extreme foreign investor exposure to US equities, leverage and circular financing inside the AI ecosystem, that correction could morph into a global risk-off event,” it said.

While the contrarian bet would be America’s superpower status grants it the “exorbitant privilege” to run large deficits and pile up debt indefinitely, Nomura believes the symbiosis of rising UST yields feeding the fiscal deficit and now the current account deficit hints that this privilege has limits. “The size of US IIP portfolio liabilities have become so large that moderate percentage declines can now outstrip declines in US IIP portfolio assets, shrinking US NIIP liabilities and depreciating the USD,” it concluded.