Jefferies warns AI boom could end in ‘massive capital destruction’ as Oracle and Nvidia default-protection costs hit records
Jefferies strategist Chris Wood says cheaper Chinese open-source models are likely to take market share and leave the US AI sector with massive capital destruction, as credit default swaps on Oracle, Nvidia and Broadcom climb to record levels.
The most likely long-term outcome of the AI boom will be “massive capital destruction” in the US, with market share going to cheaper open-source Chinese models, according to Chris Wood, global head of equity strategy at Jefferies Financial Group, Bloomberg reported on Friday, October 9.
Wood's argument
“Initially the focus was on the cheapness of China models and the related commoditisation threat facing large language models,” Wood wrote in a report on Friday. “But now there is also a growing realisation that China has become a technological peer to the US in AI.” He cited usage data from OpenRouter, a global model aggregator.
Wood has raised the theme before. In July, IANS reported his note showing that top Chinese models processed 36.39 trillion tokens on OpenRouter in the week ended July 19, against 7.39 trillion for leading US models, and warning that the US AI boom was increasingly financed by debt rather than internal cash.
Credit markets flash warnings
Separately, IFR reported that the cost of default protection on AI-linked companies has climbed to all-time highs:
- Oracle five-year credit default swaps widened to 257 basis points on Thursday, October 8, the highest since at least 2009 and up from 182bp in mid-September.
- SpaceX CDS widened about 50bp to a record 197bp.
- Nvidia CDS are hovering near the all-time high of 87bp reached in late September.
- Broadcom CDS were quoted at 133bp, more than triple late-May levels.
Some bankers describe the move as investor indigestion after heavy bond issuance by hyperscalers rather than a fundamental concern, IFR said. But Andrew Sheets, global head of fixed income research at Morgan Stanley, noted that these companies are now embedded in the credit ecosystem in many ways, leaving more of the market exposed to them.
Sources: Bloomberg (via Bloomberg Law); IFR; IANS.
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