Author: Zhao Ying, Wall Street Insights

The US economy is standing at the crossroads of multiple risks. The blockade of the Strait of Hormuz has driven up oil prices, the private credit market is under increasing pressure, the AI investment boom is showing signs of overheating, coupled with the divergence in consumer confidence and the narrowing fiscal buffer, any loss of control in any of these areas could become the fuse for a systemic crisis.
... Since Iran effectively blocked the Strait of Hormuz, global daily oil supply has decreased by as much as 16 million barrels, with Brent crude briefly reaching $110 and Dubai crude breaking through $150 last week. This energy price shock has compressed the available capital of Middle Eastern sovereign wealth funds, which are precisely the key funding sources for large private AI companies like OpenAI and Anthropic. Meanwhile, the US private lending market is showing warning signs of rising redemption pressures and loan default rates. Former Goldman Sachs CEO Lloyd Blankfein recently warned that the unrealized assets piling up in the private market are brewing systemic risk, and that "at some point, there will inevitably be a mandatory factor or a liquidation moment." The turmoil in the private lending market is then transmitted to the broader financial markets through the banking system. Furthermore, the divergence in consumption is intensifying, with low-income groups already bearing the brunt of the pressure. The aforementioned risks are not isolated but intertwined and mutually reinforcing, with multiple crisis threads converging towards a single trigger point. Oil Prices: A Mild Decline or a Surge to $200? The Strait of Hormuz blockade is currently the most direct external shock. According to the Wall Street Journal, Michael Haigh, a commodities analyst at Societe Generale, estimates that if the strait remains blocked for another two weeks, global inventories will fall to historic lows, and Brent crude oil could reach the historical high of $146 per barrel set in 2008. Most economists currently maintain a relatively optimistic baseline forecast. Goldman Sachs chief economist Jan Hatzius estimates that if the Strait of Hormuz reopens by mid-April, the US economy will shrink by about 0.4% a year later compared to the scenario without the strait blockade, meaning slower growth but not a recession. Reasons supporting this assessment include: after adjusting for inflation, oil prices at $146 are about 33% lower than in 2008; the US economy's dependence on oil has significantly decreased; and futures markets indicate that Brent crude oil for April delivery next year will cost around $80 per barrel, with market expectations that oil prices will not remain high for long. However, tail risks cannot be ignored. Saudi Arabia currently exports approximately 4.5 million barrels of crude oil daily via the Red Sea port of Abu. The situation could escalate dramatically if Iran attacks the port or its oil pipelines, or if the Iranian-backed Houthi rebels attack ships transiting the southern Red Sea. Michael Haigh warned that in an extreme scenario, Brent crude could surge to $200 per barrel, but he also admitted, "I'm just speculating…this is unprecedented." The approximately $1.3 trillion US private lending market, along with the over $2 trillion global market, is facing its most severe stress test since its expansion cycle began. According to the Wall Street Journal, investors are uneasy about their loan exposure to high-risk sectors such as software, leading to rising redemption demand. Michael Dimler, senior vice president of private corporate credit at Morningstar DBRS, characterized the current pressure as a "normal credit downturn cycle," but acknowledged that lending performance is weakening. BlackRock has frozen redemptions for some of its consumer loan funds, and Apollo executives have publicly stated that some loans are "good if we can get 20 cents back." The transmission path is clear: Wall Street banks are providing financing to private credit funds using their loan assets as collateral. Once the default rate of the underlying loans continues to rise, banks will face collateral pressure—the recent continuous decline in bank stocks is a leading indicator. Christopher Whalen, chairman of credit research firm Whalen Global Advisors, issued a more serious warning, expressing concern about a "Lehman moment"—a chain reaction of collapse triggered by a concentrated withdrawal of funds from lenders. Richard Farley, a leveraged finance lawyer, also pointed out, "What we really need to worry about is the forced liquidation of loan portfolios, with everyone selling at the same time." Lloyd Blankfein, former CEO of Goldman Sachs, used a forest fire analogy, warning that "the longer the interval between two fires, the more tinder accumulates," and the longer the time since the last major crisis, the larger the potential for the next collapse. AI Craze: Economic Engine or Next Bubble? Artificial intelligence has been a major pillar of the US economy and stock market over the past year. Tech giants Alphabet, Amazon, Meta, Microsoft, and Oracle are projected to spend over $2 trillion in capital over the next three years, primarily on data centers and chips. This investment wave may still provide some buffer for the economy amid the energy crisis. However, the fragility of AI investment is becoming apparent. According to the Wall Street Journal, Todd Castagno, global head of valuation, accounting, and tax at Morgan Stanley's research division, pointed out that energy and shipping restrictions caused by the Iran war will increase the difficulty of data center construction. Middle Eastern sovereign wealth funds are a significant source of capital for large private AI firms like OpenAI and Anthropic. The closure of the Strait of Hormuz, disrupting the petrodollar cycle, means that hundreds of billions of dollars of Middle Eastern capital may withdraw from the AI industry chain annually. Meanwhile, financing for AI infrastructure has begun to cool, and investors are increasingly concerned about capital scarcity. Castagno stated, "The capital constraints across the entire ecosystem are more severe than people imagine." A significant proportion of current AI investment relies on debt financing; if data center construction stalls, it will remove a crucial pillar supporting the economy. Consumers: How Long Can High-Income Groups Hold On? The divergence in US consumption has persisted for some time, but it hasn't completely collapsed yet. Data from Urban Institute economist Breno Braga shows that credit card delinquency rates for low- and middle-income borrowers have exceeded pre-pandemic economic peak levels. The key to supporting overall consumption lies with high-income groups—boosted by last year's stock market rally, affluent families still have a strong willingness to consume. However, this support is not solid. High-income groups are less directly sensitive to high oil prices, their cars are more fuel-efficient, and their gasoline expenditure represents a smaller proportion of their income; however, once the stock market falls sharply, the wealth effect will quickly reverse and transmit to consumption. Meanwhile, low-income groups are already on the verge of collapse. Duke University economist Matthias Kehrig estimates that a $1 increase in oil prices over the past month is equivalent to a 2% loss of income for low-income commuters, "inevitably requiring other expenditures to be sacrificed." Fiscal Buffer: Last Line of Defense or Risk Amplifier? In past economic shocks, the federal government has typically played the role of a "shock absorber," smoothing out fluctuations through increased spending, tax cuts, or bailouts of the financial system. The tax cuts passed last year are currently distributing cash to residents through higher tax refunds and lower withholding taxes, objectively creating a certain degree of unplanned buffer. But shrinking fiscal space is eroding this capacity. Annual interest payments in the US are approaching 20% of fiscal revenue, the debt-to-GDP ratio is nearing a historical peak, and the Social Security fund is projected to run out by 2032. Since the start of the Iran-Iraq War, the 10-year Treasury yield has risen from below 4% to 4.32%, and last week's Treasury auctions were weaker than expected. Former White House Budget Director Mitch Daniels, who served in the Bush administration, warned: "Those who thought 'this won't happen to us,' those institutions, and even those countries, were right—until the day they were no longer right." The security of US public finances depends on both mathematics and confidence, and the reversal of confidence often comes suddenly and unexpectedly.