AI Bubble Domino Effect: U.S. Next After South Korea?

**John Johnston** (0:00)
Hi everyone, JJ here. Welcome back to The Lounge. Well, today, the second video to the day that follows on from the first one, this one about the Korean index, the cost of be crashing after a huge run up. A lot of speculation, and it is related to AI, the AI bubble. Companies there related to AI, definitely. So here we have the Prof G Markets, Ed's gonna break down what's been going on. And also we're gonna look at, could this have a domino effect to the US? Not a lot of people are taking notice of this. What happened in Korea is that there's a lot of retail investors speculating, and they were followers of a certain fund that turns out, Leopold Aschenbrenner's fund, that fell over last week, that was Heidi Leverage. So I think that he had a big following there apparently, and people were following the kind of trades and what was happening. So Leverage being the culprit, but could this spread to people doing the same thing in the US because there's a lot of Leverage, there's retail investors investing in Leverage ETFs become pretty popular. So let's see what Ed has to say here and I will react to it along the way.

**Ed Elson** (1:10)
There's been an enormous amount of volatility in the South Korean stock market. Just last week, the KOSPI index fell 22% and then days later it rose 15%. One of the biggest culprits appears to be a new wave of Leverage ETFs.

**John Johnston** (1:26)
Yes, exactly. Let's just take a look at the KOSPI while we're at it. This is the five-year. If you don't know what's been happening in Korea, look at that run-up. Say from April 2025, which is still not that long ago, it rose a huge amount, 265% just from then and then it's taken a drop. If we zoom into year-to-date, we can see that peak that happened in June, and that fund that I was talking about, the AI fund, and there may be more to come. There are other ones that are leveraged as well. I was reading about that just before I did this video, so that might be to come. But it went down to 38% down very, very quickly from the 22nd of June to the 30th of July. So, this is how quickly it can happen when people are highly leveraged. It's had a bit of a run up there, just 10 percentage points up, but you can see there on the graph, if you're watching this on video, it's been up, down, up, down, but generally the trend down and down very quickly.

**Ed Elson** (2:27)
In late May, the country launched single stock leveraged ETFs tracking two of its biggest chip makers, SK Hynix and Samsung. These funds use borrowed money to multiply the daily return of their target by two, three or even five times.

**John Johnston** (2:42)
So, there are two companies in South Korea that are definitely involved in the AI trade, right? SK Hynix and Samsung, major companies there and that's where the speculation was mostly.

**Ed Elson** (2:55)
That means that the gains are amplified when the stocks rise, but so are the losses when they fall. The products quickly became popular with retail investors looking to capitalize on the AI boom. But last week when AI sentiment briefly soured, the pressure quickly spread to South Korea's chip makers. SK Hynix reported weaker than expected earnings, adding even more pressure. All told, Samsung plummeted 32 percent and SK Hynix crashed 40 percent and the Cosby index fell into a bear market.

**John Johnston** (3:25)
Yes, and SK Hynix also started an American trade, an American stock, an ADR, American depository receipt as well. So American investors, retail investors could get in on the action without having to find a way to invest in the Korean stock market. So that's another thing. They took advantage of the bubble that's going on to get US investors involved as well.

**Ed Elson** (3:50)
So Scott, is this really just a fascinating story here?
What happened? The South Korean stock market is down 44%. Two trillion dollars in market value has been wiped out practically overnight. And the two main reasons for that are, as I said, Samsung and SK Hynix, these two chip companies, which now make up roughly half of the entire South Korean stock market.

**John Johnston** (4:16)
Wow, that's a lot. And don't forget that the mega caps, the big techs in the US make up a big chunk of the S&P 500, and certainly the NASDAQ index as well. So if something would happen to them, you know, a lot of people say they're not expensive. So it is a different story, but there's still a lot of speculation going on, especially in memory and semiconductors. The other day I showed you the semiconductor index is an ETF SOXX, which just looks parabolic. And that's one that Michael Burry from The Big Short is shorting right now. He announced that the other day that he short that index.