South Korea Just Showed Us How NOT to Bet on AI

I was out to lunch with my wife a couple weeks ago when the wheels fell off the South Korean AI trade.

“If we were in Seoul,” I told her, looking around the restaurant, “two people in here might have just lost their entire retirement nest egg.”

This was the same trade that just a month earlier had looked unstoppable.

Memory stocks were soaring, led by SK Hynix and Samsung Electronics… And employees were getting fat bonuses.

CNBC reported that a memory chip worker with a base salary below $53,000 was expected to receive a bonus north of $410,000 this year. And that was just one example.

It seemed almost daily that I was reading anecdotal reports of employees trading in their beat-up sedans for fancy sports cars.

The Korea Times ran a piece on it. They claimed new imported car registrations in Icheon—where SK Hynix makes some of its chips—spiked after the company paid out performance bonuses in February.

Registrations there jumped nearly 109% from a year earlier. Workers in their 30s and 40s were reportedly shopping for Porsches, Mercedes and BMWs.

You know things are abnormal when your central bank issues an inflation warning over corporate bonuses. The Bank of Korea did that. That’s how much money these memory companies were paying out.

The thing about excess is that it’s like a black hole. It sucks more people in until the entire thing collapses on itself. That’s exactly what we’re seeing now.

Everyone wanted a piece of the Samsung/SK Hynix pie. Leveraged products tied to these two companies drew in retail investors by the billions.

Between mid-June and mid-July alone, investors poured roughly $5 billion into 16 single-stock leveraged ETFs tied to these companies.

Then the trade broke.

On July 17, MarketWatch reported that 1.2 million South Korean retail traders were hit with margin calls. That’s equivalent to more than 3% of the country’s adult population—or roughly 1 in every 30 adults.

A margin call happens when you’ve borrowed money to invest and your holdings fall so far that your broker demands more cash or collateral. If you can’t provide it, your broker can start selling your positions for you.

What I told my wife that day at the restaurant was back-of-the-napkin math. But it wasn’t too far off. MarketWatch reported that about 350,000 retail accounts were liquidated as the market fell.

Even if you played it “safe” and didn’t use leverage, you weren’t actually safe. Because these two companies alone make up roughly half of the KOSPI (South Korea’s version of the S&P 500).

When those two stocks fell, they pulled much of the market down with them. The KOSPI fell 27% from its record high. And the damage isn’t over yet. Yesterday it dropped another 11%, and another 6% this morning.

These investors weren’t necessarily wrong about AI. They were wrong about how they bet on it.

How a Good Story Became a Bad Trade