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Why AI’s Recent Financing Loops Could Be a Canary in the Coal Mine
The AI sector’s recent wave of “partnerships” increasingly looks less like pure demand and more like captive financing - where suppliers fund their customers to buy more of their own products.
History shows these kinds of circular loops can fuel bubbles - and snap hard when the cycle reverses.
Why it matters: This isn’t just about one deal - it’s about the nature of the AI boom, which already shows a froth. Healthy markets rely on real demand. Customers buy because they need the product. But when the seller bankrolls the buyer, that’s leverage dressed up as growth. History reminds us these loops almost always snap. Cisco, Lucent, Nortel - they floated carriers in the ’90s, watched them spend it back on supplies, and cheered on the “demand.” But then, when the bubble burst, balance sheets never recovered. Today’s circular financing may be AI’s canary in the coal mine.
Now the Deep Dive: At first glance, these AI financing loops look like brilliance. The sector is flush with cash (always a good problem) - but limited in where it can spend it.
For instance:
Buybacks barely dent the pile
Regulators push back on acquisitions,
And hiring talent fast enough is nearly impossible.
So instead, firms are turning into banks of sorts—lending directly to their customers to accelerate adoption of their own products.
This is dubbed ‘captive financing’ - when a company acts as both the seller and the lender for its own ecosystem.
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A big tech company – like OpenAI - wants to buy a ton of GPUs for their data centers.
Those chips are really expensive, so instead of arranging financing through a bank or issuing stock, the GPU maker itself says, “Hell, we’ll loan you the money so you can buy our chips right now.”
The supplier books the sale and collects interest, while the lab gets the equipment it needs to scale.
Of course, many firms use captive financing models - Ford Credit, Apple Financing, GE Capital. And on Wall Street, this often looks like vertical integration, which excites investors.
Yet there's a big difference. . .
See, Ford Credit and Apple Financing spread risk across a vast consumer base - millions of buyers, spread throughout the entire economy. That’s one thing.
But it’s another when financing gets concentrated in a single sector.
For example - in the late ’90s - Cisco, Lucent, and Nortel extended loans and guarantees so carriers could keep buying their gear.
And the stocks soared because of this loop (new loans -> new sales -> more cash flows -> repeat).
That is, until they didn’t. . .
Once things began falling apart, major firms curtailed lending, and new orders collapsed – leading to the bubble imploding faster.
So, while Wall Street may cheer such financing, beware. It isn’t evidence of unstoppable AI demand - but rather that demand may need propping up.
Said another way, circular financing like this can create fake momentum.
Imagine a landlord loaning you the rent money each month. They collect payment, but the whole thing is a closed loop. Once the lending stops, so do the payments.
Thus, when the cycle reverses - as all cycles eventually do - this fake momentum can quickly reverse the other way as orders vanish, debt bites, and the fall is steeper because the boom was fueled by a mish-mash of circular deals.
The point is, this may not be the clean growth story markets want it to be. It could be a signal that the AI trade is already closer to late-cycle than investors think.
As always, just something to keep in mind.
Figure 1: Dunham, September 2025
One-Third of Student Borrowers Are Still Delinquent — And the Fallout Could Hit Every Household
Nearly one-third of student loan borrowers are 90+ days delinquent, dragging down credit scores and choking off access to cars, homes, and credit lines.
The debt isn’t going away – it’s built on decades of runaway tuition, stagnant wages, and government-backed loans that created a feedback loop now straining borrowers.
Why it matters: Roughly 30% of American student borrowers are in delinquency – showing the financial stress they’re facing. And this isn’t just about unpaid loans anymore. When delinquencies surge, defaults soon follow. Then credit scores collapse, shutting borrowers out of cars, homes, and new credit lines. That trade-off ripples outward as spending contracts, banks tighten, and systemic risk builds.
Now the Deep Dive: Let’s get right down to it. Nearly one-third of student borrowers are delinquent. Millions haven’t made a payment in 90 days or more. Defaults are next, which means seized tax refunds, wage garnishment, and cratering credit scores (since you can’t “repo” a degree).
The credit hit is brutal. Scores have dropped 60–170 points - slamming even prime borrowers into subprime territory. That locks people out of cars, homes, and even rentals. Banks tighten. New credit lines vanish. Spending contracts. It’s the kind of slow-burn systemic risk that spreads quietly - first into household budgets, then into broader consumption and lending.
And this wasn’t random - it might’ve been baked in all along.
This caused a brutal feedback loop: Tuition climbed = more debt was needed = tuition climbed higher = more debt needed.
Even if all student loans were forgiven tomorrow, anyone enrolling next year - or the decade after - will face the same feedback loop unless something structurally changes.
Thus, students borrowed, schools spent, balances ballooned, and wages lagged until repayment became increasingly difficult.
Now, the story isn’t about “kids protesting” loans. It’s about the math behind old loans and the new loans going forward as credit scores sink.
The uncomfortable trade-off is simple - it’s far more difficult (and costly) to buy a home if your credit score tanks. And you can’t finance a car if you’re already delinquent on one. You can’t even rent in many cities without good credit.
This is how systemic risk creeps in. The credit system – which is the lifeblood of the economy - depends on trust and repayment. Thus, when millions show they can’t - or won’t - pay, the foundation can begin eroding.
Keep an eye on this.
Figure 2: Bloomberg, September 2025
Half of U.S. Spending Comes From the Wealthy: Why That’s Riskier Than It Looks
The top 10% of U.S. households now drive nearly half of all consumer spending, fueled by record asset gains - not broad-based wage growth.
But even prime and super-prime borrowers are slipping into delinquency, showing stress isn’t confined to the margins but spreading across the system.
Why it matters: That concentration may keep the economy afloat for now as the wealthy continue spending amid surging asset values, but it leaves growth dependent on just 10% of households (very unbalanced). Thus, if markets stumble and asset values dip - or if the affluent simply pull back - consumer spending (which is beginning to see issues in their credit payments) could stall.
Now the Deep Dive: This trend is worrying because it shows the spending engine hasn’t lifted the whole economy - it’s flowed upstream. Yet another sign of the widening wealth divide that continues to plague the nation.
Moody’s data (chart below) shows the richest 10% of households now drive nearly half of all U.S. consumption.
For context, in the early 1990s that figure was closer to a third.
And it’s starting to become noticeable. . .
Just take a look at Disney. As The New York Times7 reported last month, the company no longer caters to the middle class. Its pricing model is built around a thick layer of wealthy families willing to pay whatever it takes.
But this same pattern shows up across the economy - from Taylor Swift tickets to Louis Vuitton bags to premium travel. The affluent are keeping registers ringing while everyone else tightens belts and firms decide to focus on the top-10%.
And they can spend because their balance sheets have never looked better.
Well, for now it is. But this is where fragility hides itself.
See, the bottom ~90% have only barely kept pace with inflation since the pandemic started (with the bottom 50% greatly lagging it). Now, wage growth is soft. Debt delinquencies are climbing. And the stress isn’t just at the margins. Even the safest borrowers are slipping (the wealthy).
When “safe” credit profiles begin to slip, it proves the strain isn’t confined to risky households – but rather it’s spreading across the system.
That means the robust U.S. consumer story is more about asset owners than wage earners – aka the haves versus the have-nots. And remember, asset-driven spending cuts both ways - it can surge when stocks rally and collapse even faster when they don’t.
Put another way, when the top 10% sneezes, the rest of the economy catches the flu.
But for now, they’re still spending, and corporate earnings look healthy because of it.
Just don’t mistake that for a booming underlying economy.
Figure 3: Bloomberg, September 2025
Anyway, who knows how this will all play out?
This is just some food for thought as we watch how these trends develop.
As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.
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