The Looming Stock Market Crash: A Looming Threat to Global Economy

Strategic Insights -

The increasing value of seven major US tech companies - Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla - has pushed the stock market to record highs, but experts believe this is a result of speculative bets rather than grounded valuations. The vast sums being poured into artificial intelligence are bets on a technology that has yet to deliver sustainable profitability. Despite this, hundreds of billions of dollars are being invested in AI, and the stock market valuations have become detached from any reasonable expectation of earnings, a classic sign of a bubble.

Key Takeaways:

  • The current stock market valuations are detached from any reasonable expectation of earnings, a classic sign of a bubble.
  • The stock market crash that is almost inevitable will be sharp and widespread, affecting not just the US but also the global economy.
  • Every major crash since 1929 has wiped out a large share of notional wealth in a short time, and the greater the over-valuation, the deeper the correction will be.
  • The initial effect of the crash will be sharp falls in share prices, and the greater the concentration of over-valuation in one sector - technology and AI - the higher the likelihood of a severe and rapid fall.
  • Pension funds will see the value of their shareholdings fall, and defined benefit pension schemes will have to top up the resulting deficits, reducing productive activity.
  • A stock market crash can create systemic risk for the financial system worldwide, and governments will face a stark choice: let banks fail or intervene to save them.
  • The greater the interconnectedness of the financial system, the higher the risk of systemic failure, and the shadow banking world is vastly larger and less regulated than it was in 2008.
  • The Bank of England knows this but has done little to address it, and the lessons of 2008 have been ignored, ensuring that the risks have been shifted around rather than removed.
  • The response to the next crash will not be avoided by wishful thinking, but its consequences could be managed if governments chose to act in the public interest.
  • The next crash could mark the end of neoliberalism or its grim rebirth, depending on the courage and imagination of those in power.

Statistics:

  • The seven major US tech companies - Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla - have pushed the stock market to record highs.
  • The vast sums being poured into artificial intelligence are bets on a technology that has yet to deliver sustainable profitability.
  • Hundreds of billions of dollars are being invested in AI, and the stock market valuations have become detached from any reasonable expectation of earnings.
  • The knock-on effects of a stock market crash can be significant, with pension funds seeing the value of their shareholdings fall and defined benefit pension schemes having to top up the resulting deficits.
  • The initial effect of the crash will be sharp falls in share prices, and the greater the concentration of over-valuation in one sector - technology and AI - the higher the likelihood of a severe and rapid fall.
  • The value of £1 trillion could be lost in the UK alone, more than three years' national income.
  • The bond market is being pushed up, with effective bond yields or interest rates moving inversely to their price, which can eventually provide households with more disposable income and stimulate spending.

Sources:

  • Professor Richard Murphy (no source specified)
  • London Stock Exchange (no source specified)
  • Bank of England (no source specified)
  • Rachel Reeves's Treasury (no source specified)
  • Alistair Darling (no source specified)
  • Gordon Brown (no source specified)
  • Scotland (no source specified)