Transcription
Imagine getting a text message that wipes out your whole net worth. You check your trading app, you pray for a glitch, but it's not a glitch. Your life savings are actually gone. The truth is actually worse than zero because now you owe the bank a fortune.
That exact nightmare just hit 300,000 young Korean investors. They didn't just lose cash on a single bad trade, but an automated system basically forcibly liquidated all of their accounts. >> Yeah, abundance expression, right? There's a bit of soul searching out in Korea. >> This machine run on AI hype plus heavy debt. The South Korean stock market completely breaking led to a quarter of a trillion dollars wiped out [music] in days.
>> On Monday, the KOSPI plunged to close at the 6,500 level. The main KOSPI opened lower and plunged more than 4% closing at 6,516.27. >> After that, that triggered seven consecutive market circuit breakers. This is not a normal crash. The culprit were leveraged funds and a lot of desperate young people providing the fuel. And now what's going on with the Korean stock market is now setting shockwaves through the US.
So, South Korea is a global manufacturing powerhouse, but in early 2026, the stock market changed because the entire financial system then became concentrated and focused and obsessed with artificial intelligence. We all know that these new AI models require a lot of computing power and that power relies heavily on memory, specifically HBM or high bandwidth memory chips. So, there's a company in Korea called SK Hynix that controls roughly half of this global market. >> [music] >> They hold a near monopoly alongside Samsung Electronics. So, trillions of Korean won flooded directly into these two companies and by June of 2026, these two companies made up half of the Korean stock exchange, the KOSPI index specifically. [music] Think about the American stock exchange for a second. Imagine if two tech giants controlled half of the S&P. That intense concentration basically made the South Korean stock market a very high-risk, high-reward bet because basically there was no more diversification. A standard [music] index fund on the Korean stock exchange basically became a huge bet on AI.
And so, this massive wealth shift attracted a very specific group. Young South Koreans in their 20s and 30s rushed in. They already have a tough domestic job market out there. It is also hard therefore local people to afford housing prices. So, the stock market looked like their only escape path or their path out. >> [music] >> During the 2020 pandemic, some of these young Korean traders actually came together and bought the dip [music] when foreign investors sold and many of them made a lot of money from that. >> Because I work in the tech industry >> [music] >> and I worked in AI company since 2017. So, I believe in that future. [music] I'm sitting on the position of 1,300% of gain. >> And so, like many, they saw this new semiconductor rush as a new path out. But then the government gave them a weapon that they didn't fully understand.
So, in May of 2026, the South Korean government made a choice. Officials saw domestic money flowing into American tech stocks and they desperately wanted to keep that cash domestically. So, regulators approved a new volatile financial product, [music] the single stock leveraged fund. These tie directly to local champions like Samsung and they promised to double the daily profits. Young traders love stuff like this. A booming stock market, being able to buy on leverage. That is their path out. It is their lottery ticket. So, this created a massive culture of borrowing to invest. Then there were a bunch of college students and young professionals maxing out their credit and as a result retail margin debt hit all-time records. Loan balances had hit 30 trillion dollars of won. These investors rarely were using cash that they already had on hand.
Now, on the South Korean stock market it takes two days [music] to officially settle a trade. Traders use this gap to buy funds with phantom money. They would go sell one stock and immediately buy leverage. And this retail market aka group of regular people were exposed. Meanwhile, their government was celebrating as the market hit record highs because they saw this debt-fueled rally as a huge international geopolitical win. But, this mechanism also requires continuous forward investment to survive. >> College student Kim Jae-min said the market swings were difficult for him psychologically. I ended up selling at an absolutely ridiculous low price. After that, I kept thinking to myself, "Why did I do that?" It was so painful. I couldn't sleep at night and at 3:00 a.m. I opened my laptop and wrote a post on my blog asking myself why I had acted that way.
So, while local traders in Korea took on debt to invest in Samsung and SK Hynix, foreign institutions started exiting. One catalyst here was a SpaceX IPO. Basically, a lot of foreign institutions had to pull money out of Korea to invest in SpaceX. SpaceX raised $75 billion at a very big valuation and a lot of global asset managers basically needed [music] quick cash to be able to buy in. There were a lot of people getting in at the last minute, which I'm sure you guys saw some news articles about. >> SpaceX gears up to finalize its IPO pricing today. This is an offer that attracts more than $70 billion in orders from retail investors alone. >> So, to get money to invest in SpaceX, they had to sell off their tech stocks in Korea. That was one catalyst that started the downward cascade, but then things got a lot worse a month later because on July 10th SK Hynix decided to list on the Nasdaq. >> SK Hynix's US listing is way oversubscribed, priming the Korean memory maker for the biggest ever foreign first-time share sale in America. >> They raised over $26 billion in America, which is considered a huge victory for SK [music] Hynix. >> There's clearly demand, you know, heading towards $200 of demand [music] for a $26.5 billion deal. When we talk about it being oversubscribed, that's that's how I'd frame it in the dollar terms.
This move gave them direct access to American capital markets, but it was a huge disaster for the Korean stock market. Because foreign investors no longer needed to trade through Seoul. [music] >> I think what you're seeing in Korea in particular is that there's still that kind of dip buying within retail. Yes, you may have had some profit taking post [music] Samsung results, etc. That means that you have downside. But until I think you see persistent weakness over [music] multiple days, multiple weeks, I wouldn't really call it a bear market.
Imagine being a US investor. There's a bit of a road block whenever you buy international securities because you have to exchange your local currency to the currency of the country that you're trying to buy in. And so with this listing on the Nasdaq, basically [music] Americans could easily buy the stock in US dollars. So capital basically shifted away from the KOSPI index back to the Nasdaq. A major index provider even denied South Korea an upgrade. And what happened after that was that trillions of dollars from passive global funds turned [music] away. >> Yesterday, Hong Kong surged by more than 3%. Korea suffered its biggest sell-off in months. Is this simply money rotating out of an overcrowded Korea tech trade, or are investors, in your opinion, fundamentally re-rating China now?
So foreign institutions started pulling money out of Korea. But remember, some of these young Korean investors have put in all of their life savings and more, even borrowing money to invest in the Korean market. >> A normal index fund usually buys and holds a basket of stocks, but a leveraged single stock fund works a little bit differently. It doesn't borrow money to buy more shares, but they make massive bets with global banks. So, banks agree to pay the fund double the daily profit, and to cover that bet, banks trade the actual stock. This puts a huge problem when the market goes down cuz the funds have a strict rule that they have to follow. [music] They must, at the end of every day, be balanced for tomorrow. If the underlying stock drops five basis points in one day, then the leveraged fund instantly loses 10 basis points of its values. >> There are these levered ETFs that have become so much more popular, um, and that means that on the upside you get more juice, but on the downside you get squeezed more, too.
So, the fund shrinks to keep everything balanced, and they are mechanically forced to sell shares before closing. >> And even we talk about like 30 years ago, 20 years ago, people worried about mutual funds. You know, worried about the rebalance of ETF, but right now ETF rebalance is like, uh, uh, a BAU, and it didn't, you know, dis- uh, distorting the the the market mechanism. >> By early July, there was a SK Hynix fund that had $13 billion, and this single product grew so massive that it consumed most of the company. >> This ETF, KOSPI SK Hynix leveraged product, it was listed in Hong Kong in October, and in just a couple of months time has grown so large and so fast. So, it now has asset under management of $13 billion, and that is largest of its [music] kind globally.
The daily balancing act made up most of the trading, and SK Hynix no longer traded based on the [music] actual business health of the company. Traders didn't care so much about AI demand anymore. The stock started to dip naturally. The fund dumped millions of shares. This forced selling was starting to drive the price down every single day, and about to trigger a really bad nightmare. >> The Kospi shed 10% on Tuesday. It did recover a little bit today, but memory chip giants SK Hynix and Samsung make up about 50% of that Kospi index. The slide coming as regulators warned that the popularity of levered ETFs could lead to increased volatility. There were some rumors about measures they might take to clamp down on speculation. The Kospi is still over 100% higher for the year, but all of this could be potentially a warning sign.
On the morning of July 13th, the Korean stock market officially broke and they experienced a [music] black Monday. So, there was a huge wave of forced bank sell-offs. Prices dropped yesterday. Banks demanded their borrowed money back. Young investors had no money to give back. Some of their accounts were seized. Investors dumped millions of shares for whatever price they could get. And this morning fire sale basically started this downward death spiral of the price. >> As futures and spot prices plummeted, the Korean exchange stepped in to stabilize the market. At 10:52 a.m., a sell-side circuit was triggered on the KOSDAQ as a futures index dropped by more than 6%, suspending program trading for 5 minutes. This marks the 10th sell-side circuit triggered on the KOSDAQ this year. Shortly after at 11:21 a.m., the KOSPI saw its 20th sell-side circuit of the year as the KOSPI 200 futures fell more than 5%.
The leveraged funds were also forced to sell off more shares than that triggered more sell-offs the next day. The market crashed so fast it tripped seven emergency breakers and the entire stock market was halted for 20 minutes. >> On Monday, the KOSPI plunged to close at the 6,500 level. The main KOSPI opened lower and plunged more than 4%, closing at 6,516.27. >> There were some investors unfortunately that didn't just cut their losses and run away. Some of them even threw more money at the crash thinking that they They buying the stocks at a discount. But by the end of the week over 300,000 retail accounts were entirely wiped out. People lost their savings. They were left holding all this additional debt. The government and politicians had to step in. The South Korean AI bubble had popped and this was not good. The KOSPI dropped almost 9%. SK Hynix and Samsung dropped 15% and 10% respectively and the shock waves were going to America.
Now all of this stuff was happening simultaneously as Kevin Warsh made his debut as Federal Reserve Chair in July. He's known for his strict monetary policy. He also said that interest rates are going to stay high. >> Price stability and maximum employment. And these objectives guided our business in the meeting just concluded. As you saw a few moments ago, the committee decided to maintain the target range for the Fed funds rate at 3 and 1/2 to 3 and 3/4%. >> Markets hate high interest rates and even more the reason for US investors to pull money out of the Korean stock market. On that day, Micron went up 7% and billions of dollars were road paid back into the US stock market.
As the local Korean stock market was burning, the Korean government hit the panic button. On July 16th, regulators paused all new leveraged funds because the exchange had triggered seven separate circuit breakers across the month, which led to a bunch of emergency halts basically to stop the bleeding. But halting the stock market didn't [music] save any young investors at all. So South Korea's Financial Services Commission had to fast track a few new rules. First, they're now tripling the minimum cash deposit required for investors to trade [music] and now they require 30 million won, which is roughly 20,000 US dollars just to participate in trading. They also got rid of substitute collateral because usually traders are allowed to post existing stocks or bonds as collateral and regulators are now wanting cash for settlement. Now, this emergency policy is being criticized because the South Korean government spent months letting investors know that it was okay to buy these products. Over 1.2 million retail investors had to face margin calls, forced liquidations, and pretty much lost all of their money.
>> [music] >> These losses were even more amplified if any of these traders had bought into the single stock leveraged ETF. That SK Hynix single stock leveraged ETF, which is designed to deliver two times the daily move [music] in SK Hynix, has fallen from 70% of its record high and is down 50% since its original debut. And according to stats from the South Korean media, over 60% of these liquidated investors are people that are under the age of 30. >> [music] >> So, what does this crash mean for America? South Korea was the canary in the coal mine. >> If Hynix is is increasing capacity in commodity and taking capacity away from these super high margin, super high priced AI chips, the big question investors are saying is why is that? Is there Is there signs that the AI trade or the momentum side of things or the cost dynamics aren't quite as rosy as we as they were first predicted.
The US market faces the exact same concentration risk. A tiny group of tech giants carrying the entire US economy [music] and with higher interest rates, cheap debt is gone. >> If you look at the Mag 7 stocks, you know, they all they become a funding trade for the the semis and the AI on the other side of the AI trade. So, it's kind of like it's like the AI buyers who are these hyperscalers versus the AI sellers who are the the chip companies selling to them, there is something going on within this dynamic. So, it's something to watch for. >> US tech companies have to prove real AI profits fast. [music] And South Korea proved that when hype meets debt, collapse happens [music] fast.