It’s beginning to look like it. Led by the US, global share prices have climbed too far, too fast. Red hot US top tech stocks like Nvidia have turned into trillion-dollar companies, making investors fortunes as they rocket.
The hype over artificial intelligence (AI) has only added fuel to the fire. Some investors believe AI will transform society and finally drag us out of the economic torpor of the last two decades.
AI’s advocates – or should we say fanboys – reckon it will transform productivity, making us fitter and faster economically.
What they don’t tell us that it may also destroy millions of jobs, slashing company costs and driving up profit margins.
The impact could be huge, even in the UK. Struggling FTSE 100 telecoms giant BT Group plans to transform its ailing profitability by slashing 55,000 jobs by 2030.
Good news use for BT shareholders, bad news for its workers.
But there’s a catch.
AI excitement has gone too far, just as it did during the dot-com boom of the 1990s.
That ended in an almighty crash that slashed share prices in half and destroyed a heap of overhyped net-based companies such as Pets.com and Boo.com.
After the crash in March 2000, shares prices kept falling for another two years. If that happened today it would spell disaster for Stocks and Shares Isa savers and pension savers.
At retirement, most Brits now leave their money invested in shares via drawdown, and take income as required.
If markets crash, so will the value of their savings. Plus they’ll be able to take less money. I’ve been warning this could be a nightmare ever since pension freedom reforms were introduced in 2015. Nobody has listened.
Now that dark day could be upon us.
But before we panic and run, let’s see what’s really happening.
Fears over AI hype aren’t the only reason the US stock market has plunged, and Asian markets followed this morning.
Many reckon the US Federal Reserve has been too slow to cut interest rates, after holding them yet again at its meeting on Wednesday.
Even the Bank of England got round to cutting interest rates yesterday, and it’s about as cautious as a central bank can be.
Yet the Fed is caught between a rock and a hard place.
On one hand, inflation is proving more stubborn in the US than here. That’s because the country’s economic policy is a shambles (as well as its politics).
Well the Fed battles to cool the economy, Democratic President Joe Biden’s bizarrely named Inflation Reduction Act is pumping trillions of stimulus into the US economy.
It should be renamed the Rampant Inflation Act.
This policy mismatch briefly happened in the UK during the Liz Truss terror, when she tried to inflate the economy through unfunded tax cuts while the BoE desperately tried to cool inflation through interest rate hikes.
The pound collapsed as a result. Rishi sunak and Jeremy Hunt quickly reversed course.
The US dollar hasn’t collapsed because it’s the global reserve currency. That’s allowed the country to continue with its disastrous two-way policy.
Because US don’t like to criticise Joe Biden for fear of getting Donald Trump, so no one is knocking his crazy spending plans.
Now we may soon be paying the price.
While Biden has missed up, Donald Trump could prove an even bigger disaster for the global economy if he wins.
Trump has threatened to slap tariffs on every foreign import. Not just from China, but the EU and UK, too. So much for the special relationship.
This plays well Trummp voters, who don’t realise that they will be the ones who pay the price, as companies tariff costs onto consumers.
Trade wars always end badly for everyone concerned, so nobody in their right mind wants that.
Trump thinks it’s a good idea though.
Yesterday, Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management, said “there are concerns that the US economy will collapse in a big way”.
He’s worried about the impact on Japanese stocks, but every other country will suffer too, including the UK.
Funnily enough, we’re in a relatively good place. Our stock market is highly undervalued, having struggled for years.
Politically, we are now one of most stable countries on the planet, after the Labour landslide. With luck, these factors will help shield UK shares.
That won’t help domestic investors much, though. Today we only invest 4% of our long-term savings in the UK, with most putting the majority of their money in the US.
So will the crash happen? Nobody knows and don’t believe anybody who says they will.
If the slide continues, the Fed will have to slash interest rates in a big hurry. The Bank of England could cut rates again, in that case.
With luck that will stall the crash. Only time will tell. Hold tight, it’s going to be a bumpy ride.
